6 September 1989 Ministerial Letter 73928 F - Nature of Payments

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.

Subject: 24(1)

This is in reply to your memo of May 17, 1989 concerning the tax treatment of certain payments made by the Taxpayer in 1987 and 1988.

The facts of your situation are as follows:

24(1)

With respect to the above situation, you have asked us to consider paragraph 18(1)(a), subsections 56(2) and 15(1), and the nature of the payments made to the individual.  Our comments are set out below.

Paragraph 18(1)(a)

In relation to the payments in 4 above, we have noted that the Taxpayer made gifts to the Charity during 1987 and prior years which were deductible under paragraph 110(1)(a).  In determining whether the payments in question are deductible under paragraph 18(1)(a), it is our view that they are analogous to gifts.

In this regard, paragraph 3 of Interpretation Bulletin IT-110R2 indicates that a gift is a voluntary transfer of property without valuable consideration.  Since the information you have provided indicates that the payments possess these characteristics, it is our view that they are gifts.  Gifts generally are not regarded as having been laid out for the purpose of gaining or producing income from a business unless the taxpayer can demonstrate a direct relationship between the gifts and the sales that resulted from them.  Accordingly, they are not deductible under paragraph 18(1)(a).

Subsections 56(2) and 15(1)

With respect to these provisions, subsection 56(2) refers to "a payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on some other person.  From the information you provided us, we are not aware of any basis for alleging that the payment was for the benefit of a shareholder of the Taxpayer. With respect to whether the shareholders desired to confer a benefit on the individual, the Department indicated on page 49:4 of the Report of the Thirty-Seventh Tax Conference that, in relation to subsection 56(2), it was not its practice to tax the same income twice.  Accordingly, we are of the view that since it is appropriate to tax the individual, subsections 15(1) and 56(2) should not be applied to include the payments in the incomes of the shareholders.

Nature of Payments

In your situation, it is our understanding that the payments made by the Taxpayer and others to the individual in the latter part of 1987 and 1988 had no effect on the manner in which he performed services for the Charity.  In addition, subsection 5(1) refers to "remuneration, including gratuities, received by him in the year" and makes no mention of the payor.  A voluntary payment made to an employee or office holder would ordinarily be treated as income to him from an office or employment if it is related to his employment or office.  It is, therefore, our view that the payments in 4(a) above should be included in the individual's income under subsection 5(1).  We note that in the event the facts were to show no employer-employee relationship between the Charity and the individual, it would be our view that the payments to the individual were in the nature of income from a business.

ChiefServices, Public Utilities &Exempt Corporations SectionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch