8 May 1997 External T.I. 9707165 - REPORTING FOR EMPLOYEES

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:

Reporting of payments and prizes

Position:

If there is an employee-employer relationship, the payor is required to file forms under regulations 200. Taxability of prizes is dependent on the terms and conditions. Could be employment income, business income or other income under 56(1)(n) unless it is a prescribed prize.

Reasons:

Case law has developed guidelines for determining employee-employer relationship. In accordance with law and various departmental bulletins

XXXXXXXXXX 970716

Attention: XXXXXXXXXX

May 8, 1997

Dear Sirs:

This is in reply to your letter of March 1, 1997, wherein you requested some information with respect to the reporting of certain payments made by the XXXXXXXXXX, a non-profit organization. You further enquire as to the taxability of certain prizes awarded by your organization.

Part II of the Income Tax Regulations (the "Regulations") requires an information return to be filed by the payor in respect of the amounts described therein. The determination as to whether or not a T4 or T4A supplementary slip is required depends on the characterization of the payment made. Similarly, the characterization of prizes awarded by your organization is dependent upon the terms and conditions thereof. Accordingly, we cannot provide any specific opinions and suggest that you consult with the Ottawa Tax Services Office in this regard. Nevertheless, we will offer the following general comments which may be of assistance in your case.

Generally, all amounts paid by your organization to a particular taxpayer will be included in the taxpayer's income either as employment income or business income. Whether the amount constitutes employment income or business income will depend on whether the taxpayer is an employee or an independent contractor. Under common law, the general test to be applied is the nature and degree of control over the person alleged to be the employee. Many factors must be taken into consideration in establishing whether an individual is an employee or is self-employed. The question to be decided is whether the contract between the parties is a contract of service or is a contract for services. A contract of service generally exists if the person for whom the services are performed has the right to control the amount, the nature and the direction of the work to be done and the manner of doing it. A contract for services exists when a person is engaged to achieve a prescribed objective and is given all the freedom he requires to attain the desired result. In this regard we note that the contract may be written or oral. Where it is determined that the particular taxpayer is an employee, your organization will be required to file the necessary forms under section 200 of the Regulations.

With respect to prizes awarded by your organization, we refer you to Interpretation Bulletin 257R (attached) entitled Canada Council Grants for general comments on the characterization of prizes. As noted in paragraph 2 therein, depending on the nature of the prize, the status of the recipient, and the arrangements or circumstances under which the prize is awarded, the prize may be included in the recipient's income as employment income, business income, or other income. Where the taxpayer receives the prize by virtue of or in connection with employment, the fair market value of the prize is included in the employee's income from employment under sections 5 or 6 of the Act. If there is no employer-employee relationship between the payor and the recipient and it can be established that the amount is a business receipt, the amount is included in income from business under section 9 of the Act.

However, if the amount received is a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer, the amount is included in the taxpayer's income under paragraph 56(1)(n) of the Act to the extent that it exceeds $500. It should be noted that a prize meeting all of the criteria of a "prescribed prize" is not included in computing the income of the recipient, even if the prize relates to accomplishments in the recipient's ordinary field of endeavour. Section 7700 of the Regulations defines a prescribed prize as any prize that is recognized by the general public and that is awarded in 1983 or later years for meritorious achievement in the arts, sciences or services to the public. Any amount that can reasonably be regarded as having been received as compensation for services rendered, or to be rendered, is not a prescribed prize. Unless the prize is a prescribed prize pursuant to section 7700 of the Regulations, information returns are required to be filed under section 200 of the Regulations.

With respect to the "bonus" to be paid to an employee, we note that this bonus will be included in the employee's income from employment under section 5 and your organization will be required to file the necessary reporting forms. Should the employee contribute an equivalent amount to a registered retirement savings plan, the employee will be entitled to a deduction pursuant to subsection 146(5) of the Act.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch