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: Is a referral fee taxable to a home purchaser where a real estate agent directed his or her brokerage to pay a portion of his or her commission to the home purchaser as a referral fee?
Position: Question of fact.
Reasons: Subsection 56(2) of the Act would likely apply to include the referral fee in the income of the real estate agent. Generally, there would be no tax consequences to a home purchaser.
August 19, 2013
Re: Real Estate Referral Fees
We are writing in response to your email of April 29, 2013, wherein you requested our comments concerning the tax implications of real estate referral fees paid to a home purchaser.
It is our understanding that in a typical real estate transaction, the seller of a property pays a real estate commission to a real estate brokerage (the brokerage). The brokerage then deducts its fees and pays the remaining commission to a real estate agent (the agent).
In the situation described, an agent instructed his or her brokerage to pay a portion of this commission directly to a home purchaser as a referral fee. Had this instruction not been given, the brokerage would have reported all commissions paid as income of the agent and the agent would have paid tax on the amount.
You have asked us whether referral fees paid to a home purchaser in the manner described would be taxable to the home purchaser and whether the brokerage was required to issue a T4A slip to the home purchaser in these circumstances.
This technical interpretation provides general comments to assist you in determining the income tax treatment of your particular fact situation. The income tax treatment of specific transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted as set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Whether an amount paid to a home purchaser in the form of a gift or cash would be taxable to a home purchaser depends on the facts and circumstances of each particular sale.
In certain situations, an amount may constitute a non-taxable windfall, gift, or voluntary payment for the person receiving it. The factors used to determine the nature of a particular payment are discussed in paragraphs 3 and 4 of Interpretation Bulletin IT-334R2, Miscellaneous Receipts. It is unlikely, however, that a payment made based on an agreement between two parties would satisfy these criteria. You have stated that the referral fee was paid pursuant to an agreement between the home purchaser and the agent.
Where an amount cannot be categorized as a windfall, gift, or other voluntary payment, the amount may be taxable under the Income Tax Act (Act) if it constitutes income from a source for the recipient (for example, income from an office, employment, business, or property). Such a determination is always a question of fact.
In the situation described, consideration must be given to subsection 56(2) of the Act. Subsection 56(2) of Act requires an amount or benefit that is not directly received or enjoyed by a taxpayer to be included in his or her income and will apply where all of the four conditions set out in the provision are met:
- there is a payment or transfer of property to a person other than the taxpayer;
- the payment (or transfer of property) must be made pursuant to the direction or with the concurrence of the taxpayer;
- the payment (or transfer of property) is for the benefit of the taxpayer or for the benefit of another person whom the taxpayer desired to benefit; and
- the payment (or transfer of property) would have been included in the taxpayer's income if it had been received by the taxpayer.
Generally, we are of the view that where an agent directs his or her brokerage to pay a portion of his or her commission directly to a home purchaser, subsection 56(2) of the Act will apply to include that amount in the income of the agent in the same manner as if it were paid directly to the agent. This would be the result even where the amount may also constitute income from a source for the home purchaser.
As discussed in paragraph 13 of IT-335R2, Indirect Payments, while an amount to which subsection 56(2) of the Act applies could be included in the income of both a taxpayer and a person who receives the payment or the property, it is the practice of the Canada Revenue Agency not to assess the same income twice. Accordingly, a brokerage would not be required to issue a T4A slip to a home purchaser under the circumstances described as long as the amount was included in the agent's income under subsection 56(2) of the Act.
We trust these comments will be of assistance to you.
Nerill Thomas-Wilkinson, CPA, CA
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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