27 January 2011 External T.I. 2010-0380081E5 - Trailing commissions

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: What is the correct tax treatment of a payment for the transfer of the right to trailing commissions?

Position: The payment may be an eligible capital amount to the vendor and an eligible capital expenditure for the purchaser.

Reasons: Whether the transaction is on account of capital or income is a question of fact that must be determined in each case based on the particular circumstances of the vendor and the purchaser.

XXXXXXXXXX
									2010-038008
									Rita Ferguson
									519-645-5261
January 27, 2011

Dear XXXXXXXXXX :

Re: Technical Interpretation Request - Trailing Commissions

This is in response to your letter of September 12, 2010 inquiring about the tax implications of transferring clients, from whom you currently receive trailing commissions, to another commission agent. You wish to know whether the amount you receive from the other agent for transferring those clients will be taxable as income to you. You also ask whether the individual to whom you are transferring the clients would be entitled to deduct the amounts he pays to you.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

The correct treatment for tax purposes of the payment you are expecting to receive depends on whether the sale transaction you are contemplating will be on account of income or capital. Such a determination can only be made following an assessment of all the facts relating to your particular circumstances. It must be made on the basis of general income tax law, having regard to the principles established by the courts and to the provisions of the sale agreement. It would be difficult to summarize with precision the factors which would need to be taken into account in making such a determination on the basis of the limited information provided. One important factor is whether the rights to the trailing commissions and the related client list are part of a business or whether they are being transferred from one employee to another.

Where such a transaction consists of the sale of an entire business, or an entire division of a business, it would generally be expected that the receipt would be on account of capital. If the transaction includes the sale of any other assets, whether tangible or intangible, it would be necessary to allocate the proceeds in a reasonable manner. Where intangible assets such as a customer list or goodwill form part of such a sale the disposition may result in an eligible capital amount. Interpretation Bulletin IT-386R, "Eligible Capital Amounts" provides guidance on the meaning of eligible capital property and its treatment for tax purposes.

If the transaction also includes a restrictive covenant, such as a non-competition agreement, a number of proposed amendments to the Act may have application. Proposed new section 56.4 of the Act will generally apply to amounts received or receivable in respect of a restrictive covenant by a taxpayer after October 7, 2003. This proposed legislation will treat an amount received in respect of a restrictive covenant as income, but provides for limited exceptions whereby such receipts will be treated on capital account. The proposed amendments also include new subsection 6(3.1) of the Act which deals with amounts receivable by employees for restrictive covenants.

With respect to the transferee, a similar determination must be made regarding whether from his perspective the transaction is on account of capital, taking into account all of the facts relating to the particular circumstances of the purchaser. Interpretation Bulletin IT-187 "Customer Lists and Ledger Accounts" gives some guidelines for the determination of whether the cost of such an acquisition is a capital expenditure or a deductible expense of the year. Costs incurred for the creation or the expansion of a commercial structure are considered to be on capital account as this type of expenditure gives rise to an asset of an enduring nature. A capital outlay to acquire a customer list for use in a business of a taxpayer in most cases qualifies as an eligible capital expenditure. Interpretation Bulletin IT-143R3, "Meaning of Eligible Capital Expenditure" provides guidance on the meaning of an eligible capital expenditure and its treatment for tax purposes.

We trust that these comments have been of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch