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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
The self-employed B.C. real estate salespeople wish to incorporate their proprietorships by simply assigning their commission income to corporations (i.e., the salespeople would be licensed to sell real estate, not their corporations). Will the commission income be considered as being earned by the corporations rather than the salespeople for income tax and GST purposes?
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
Income Tax: Based on the facts provided, the business would be carried on by the individual salesperson and not the corporation. Consequently, any resulting commission income would be business income of the salesperson, and the assignment by the salesperson of such income to a corporation controlled by the salesperson would result in the application of subsection 56(4).
GST: (Comments provided by GST rulings). The individual salesperson (the supplier) and not the corporation would be engaged in commercial activities for GST purposes. While subsection 225(1) of the ETA requires the third party (i.e., the corporation) who actually receives/collects the GST to account for the tax, that same subsection also requires the supplier of the services to include amounts that became collectible in a particular reporting period, as or on account of GST when determining their net tax for a reporting period. Where the Department is satisfied that remittances will be made by the third party, the supplier will not be required to account for the tax and may claim any input tax credits in relation to the supplies. It should be noted, however, that the input tax credits that may be claimed by the supplier cannot be transferred and claimed by the corporation, even if the corporation is accounting for the tax.
5-961997
XXXXXXXXXX M. Azzi
Attention: XXXXXXXXXX
March 4, 1997
Dear Sirs:
Re: Corporations of B.C. Real Estate Salespeople
This is in reply to your letter of May 27, 1996, wherein you requested our views on certain tax issues relating to real estate salespeople of British Columbia. We apologize for the delay in responding to your request.
Our understanding of the facts is as follows:
1.In the past several years, substantially all of the real estate sales agencies operating in B.C. have converted to structures which treat salespeople as independent contractors (so called "100% houses"). The salespeople receive 100% of their sales commissions earned and pay the agencies a fee for administrative services and office space.
2.You indicate that such agencies have received rulings from Revenue Canada supporting the independent contractor status and that there is no employment relationship. The salespeople are responsible for GST registration and remittances.
3.As a result of the new independent contractor status, real estate salespeople are able to incorporate their proprietorships. The Real Estate Act of B.C. allows such incorporation as follows:
(a)Salespeople can incorporate a company and license it under the Real Estate Act of B.C. to sell real estate. This method of incorporation requires an "Agents License", minimum bonding levels, and the maintenance and audit of trust transactions.
(b)Alternatively, salespeople may simply assign their commission income to a corporation. You indicate that the Superintendent of Real Estate has issued an administrative ruling stating that such an assignment is acceptable and does not contravene any provisions of the Real Estate Act. However, to have this ruling apply, the real estate salespeople must continue to be licensed to sell real estate - a license will not be issued to the corporation. This licensing requirement is to protect the public by ensuring the continued personal liability of salespeople for any damages resulting from real estate transactions. You note that this alternative does not involve the costly and complex administrative requirements noted in alternative (a).
You have requested our views on the acceptability of using alternative (b) above. Specifically, you inquire whether the commission income, under this alternative, will be considered as being earned by the corporations rather than the salespeople for income tax and GST purposes.
Income Tax
It is a question of fact as to whether a business is carried on by a corporation or an individual. However, based on the above information, in our view, the business would be carried on by the individual salesperson and not the corporation under alternative (b). Consequently, any resulting commission income would be business income of the salesperson, and the assignment by the salesperson of such income to a corporation controlled by the salesperson would result in the application of subsection 56(4) of the Income Tax Act (the "Act"). That is, subsection 56(4) of the Act would apply, as a taxpayer (i.e., a salesperson) assigned to a person (i.e., the corporation), with whom the taxpayer was not dealing at arm's length, the right to an amount (i.e., the commissions) that would, if the right had not been so assigned, be included in computing the taxpayer's income. This provision would apply to include, in the salesperson's income, the commissions assigned to his or her corporation.
GST
Under alternative (b), the individual salesperson (the supplier) and not the corporation would be engaged in commercial activities for GST purposes. As such, the individual would be required to register for GST purposes and to collect and remit GST on the services provided by the individual, providing that the individual is not a small supplier (a small supplier is a person whose total worldwide taxable revenue and that of its associates, in the immediately preceding four consecutive calendar quarters, does not exceed $30,000). As a registrant, the individual would be entitled to claim input tax credits for the GST payable on goods or services to the extent these are acquired or imported for consumption, use or supply in its commercial activities.
The assignment of commission income to a corporation, along with the related GST, does not remove the obligation of the individual who is making the taxable supplies to register and account for GST. Subsection 221(1) of the Excise Tax Act (the "ETA") imposes an obligation on suppliers to collect GST. The Department's policy (i.e., P-131) with respect to third party remittances may apply and the corporation may also have an obligation to remit tax on the commission income it receives. While subsection 225(1) of the ETA requires the third party who actually receives/collects the GST to account for the tax, that same subsection also requires the supplier of the services to include amounts that became collectible in a particular reporting period, as or on account of GST when determining their net tax for a reporting period. This is required whether or not the third party actually collects the tax. However, it is not the Department's intention to collect tax twice on the same supply. Accordingly, where the Department is satisfied that remittances will be made by the third party, the supplier will not be required to account for the tax and may claim any input tax credits in relation to the supplies. It should be noted, however, that the input tax credits that may be claimed by the supplier cannot be transferred and claimed by the corporation, even if the corporation is accounting for the tax.
Please note that this letter does not address the issue of whether the above-noted salespeople are independent contractors. This was given to us as a fact. Furthermore, in accordance with paragraph 22 of Information Circular 70-6R3, the above comments are not advance rulings and are not binding on the Department.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1997
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1997
Email this Content