4 May 1993 External T.I. 9306705 F - Indirect 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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

This is in reply to your letter dated March 2, 1993 with respect to the application of subsection 56(2) of the Income Tax Act (the "Act") in the situation where an individual accepts a reduced salary from a corporation on the condition that the corporation pay an equal amount in salary to a child of the individual.

Subsection 56(2) of the Act applies if the following three conditions are met:

(1)     a payment must be made with the concurrence of the taxpayer;

(2)     a payment must be for the benefit of the taxpayer or a benefit the taxpayer wished to confer on another person;

(3)     the payment would have been included in the income of the taxpayer if it had been paid to the taxpayer directly.

In your hypothetical fact situation:

(1)     An employer, Co. A, wishes to hire students for the summer;

(2)     Co. A is a crown corporation that is currently subject to a hiring freeze;

(3)     In an effort to circumvent the hiring freeze without increasing the total employee payroll, Co. A may propose an option to its employees whereby they accept a reduced salary in exchange for which Co. A will hire the children of the employees for the summer. The salary the children would receive would equal the reduction in pay accepted by the parent employee;

(4)     The maximum salary that any child could receive would be similar to that which was paid by Co. A in previous summer student programs;

(5)     The child would be performing a typical "summer student" job based on past summer student programs.

Your hypothetical fact situation requires the parent to agree to the arrangement, results in the parent conferring a benefit on the child and the salary paid to the child would have been included in the income of the parent if it had been paid to the parent. Accordingly, it is our view that subsection 56(2) of the Act would apply to the above hypothetical fact situation and the income earned by the child would be taxable income of the parent.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch