24 September 2009 External T.I. 2009-0308041E5 - Tax Withholdings on Directors' Fees

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether corporate directors can have their fees paid to personal corporations without income tax withholdings and without reporting on T4 information slips? Are there any circumstances under which directors' fees paid to a non-resident director for work performed in Canada would not be subject to income tax withholdings or reported on a T4 information slip?

Position: Corporate directors cannot have their fees paid to personal corporations. Directors' fees earned in respect of work performed in Canada by a non-resident director are subject to withholdings and T4 reporting.

Reasons: Under corporate law only a natural person can be a director; accordingly, directors' fees are normally included in the computation of the income of the individual. Directors' fees paid to a non-resident director for work performed in Canada are subject to withholdings under paragraph 153(1)(a) and regulation 102 and are to be reported on a T4 information slip.

XXXXXXXXXX 							2009-030804
B. J.Skulski
September 24, 2009

Dear XXXXXXXXXX

Re: Taxation of Directors' Fees

This is further to your email of January 29, 2009 wherein you inquired whether an independent member of a corporate board of directors could have his or her director fees paid to a personal service company without having income tax withheld or a T4 information slip produced in respect thereof. Secondly, you wanted to know if there was ever an occasion where director fees paid to a non-resident board member, who was a resident of the United States, would not be subject to income tax withholdings or reported on a T4 information slip where some of the work was performed in Canada.

Paragraph 6(1)(c) of the Act requires that director fees be included in computing the income of the director. Moreover, pursuant to paragraph 153(1)(a) of the Act the corporation paying the fees is required to withhold and remit income tax in accordance with the prescribed rules.

Given that your questions are in part governed by the appropriate companies legislation, and based on the fact that you are situated in Ontario, it is presumed that either the Ontario or Federal legislation will apply. Accordingly, reference will be made to both the Canada Business Corporations Act (the "CBCA") and the Business Corporations Act of Ontario (the "OBCA"). It should be noted that paragraph 105(1)(c) of the CBCA and subsection 118(1) of the OBCA each provide that a person, who is not an individual, is disqualified from being a director of a corporation thereunder. Hence, based on the definition of an "individual" as provided in subsection 2(1) of the CBCA and subsection 1(1) of the OBCA, only a natural person can be a director of a corporation.

While directors' fees are normally included in the computation of the income of the individual director, the Canada Revenue Agency will in certain circumstances permit a departure from the foregoing tax treatment. The policy is an administrative accommodation, which under certain circumstances permits the fees to be considered the income of a partnership or corporation and not that of the individual director. Those circumstances may arise where the individual is acting on behalf of or representing a partnership or corporation as a director and the fees in respect of such services are paid directly, or turned over by the individual to the partnership or corporation. For example, a financial institution making a sizeable loan may require as a term of the loan that a senior employee of the financial institution become a director of the corporate debtor. This administrative accommodation, however, does not contemplate inclusion of the fees in the income of a personal service corporation.

Where directors' fees are paid to a non-resident of Canada for work performed in Canada, withholding pursuant to paragraph 153(1)(a) of the Act and Regulation 102 of the Income Tax Regulations is required on the same basis as a Canadian resident director. Director's fees paid to a non-resident director are reported on a T4 information slip. A non-resident director is not considered to be employed in Canada for the purposes of the Act, if he or she does not attend any meeting or perform any other functions in Canada. If the services rendered are only partly performed in Canada, the employer is responsible for apportioning that part of the annual fee paid to the non-resident director for the services performed in Canada.

While non-resident directors, who manage and supervise the business and affairs of a corporation from outside of Canada are not subject to Canadian taxes, the taxation of directors who participate in meetings of directors or of a committee of directors by means of telephone or other communications facilities, which permit all persons participating in the meeting to hear and possibly see each other, is currently under study. Furthermore, in closing, it should be noted that the fees paid to the non-resident director should be proportionate to those that are paid to other arm's length directors of the corporation. Were such fees to be found to be disproportionate, they could be characterized as a "management fee" as defined in paragraph 212(1)(a) of the Act and subject to tax under Part XIII of the Act.

We trust these comments will be of assistance to you.

Yours truly,

Phil Jolie
Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch