8 October 1999 External T.I. 9826795 - STOCK OPTIONS AND DIRECTOR'S FEES

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:

Lecturer's fees, director's fees and stock option benefits received by an individual member of a partnership and remitted to the partnership. Tax treatment to the individual and also to the other members of the partnership who received an allocation of such income.

Position:

Whether income received by a partner is that of the partner or of the partnership in any particular situation will depend on a finding of fact.

Per IT-377R, partnership can act as director. An individual can act on behalf of the partnership. However, the income earned will be that of the partnership. Also, in any other circumstances where the arrangement is entered into between the partnership and the payer for services to be performed, amounts received in respect of such services will be that of the partnership, irrespective of who performed the services.

Amounts received by an individual for his/her personal benefit for services performed by him/her and remitted to the partnership will be income of the individual under sections 5 to 8. This will occur where, for instance, the arrangement was made between the individual and the payer or the payer and the individual have an employer/employee relationship.

Fees received and included in the income of the individual partner and remitted to the partnership would not be included in the partnership's income. Instead, the amounts will be characterized as a contribution of capital to the partnership by the partner under subparagraph 53(1)(e)(iv).

Reasons:

Positions taken in:

(a) document #E9315535 dated September 27, 1993
(b) document #E53703.

(c) document #E42754 dated July 28, 1982,
(d) document #E439 dated August 29, 1980
(e) IT-377R, paragraph 4.

XXXXXXXXXX 							F.B. Fontaine
							982679
Attention:  XXXXXXXXXX 

October 8, 1999

Dear Sirs:

Re: Employee Stock Options and Director's Fees
Income of a Professional Partnership

This is in reply to your letter dated October 8, 1998 in which you requested a technical interpretation concerning the above-captioned subject.

The particular situation described a partnership whose partnership agreement provides that amounts received by an individual member of the partnership, including amounts received as lecturer's fees, or from the exercise of stock options or director's fees received as a director of a corporation, must be remitted to the partnership.

Your concern would appear to be the tax treatment in the hands of:

(i) the individual member who receives such fees and remits same to the partnership, and

(ii) the other members of the partnership.

You have also made reference to the comments contained in paragraph 4 of IT-377R entitled Director's, Executor's and Juror's Fees.

Whether or not the situation you described is a completed or proposed transaction, paragraph 22 of Information Circular 70-6R3 (the "Circular") outlines the procedure to be followed in respect of such transaction. Accordingly, while we are unable to provide confirmation of the income tax effects of the particular situation, we are prepared to offer the following general comments which represent an expression of opinion. As indicated in paragraph 22 of the Circular, such an opinion is not an advance income tax ruling and, therefore, is not binding on Revenue Canada.

1. In our view, the key determination is who has earned the relevant amounts. It is a question of fact whether or not the particular income earned in the manner described above would be the income of the individual or income of the partnership. Where it is the partnership that holds the position of corporate director, the individual partners acting as director on behalf of, or representing, the partnership will not be considered to have earned any fees related to the directorship personally where such fees are paid (directly or indirectly) to the partnership. These comments are contained in paragraph 4 of IT-377R.

2. Where it is the individual partner who holds the position of corporate director, by virtue of the definitions of the terms "employee", "office", and "officer" under subsection 248(1) of the Income Tax Act (the "Act"), the individual partner, as corporate director, would, in that capacity, be an employee. Accordingly, director's fees and stock option benefits received by virtue of such office would be considered to be employment income and will be taxable in his/her hands under sections 5 to 8 of the Act. Any such fees and stock option benefits of the individual partner, when remitted to the partnership would not be considered as income of the partnership for tax purposes. Such amounts would be characterized as a contribution of capital to the partnership as contemplated under subparagraph 53(1)(e)(iv) of the Act.

Whether any income received in the circumstances described above can be determined to be the partnership's or the individual's income would depend on certain criteria, including whether:

(a) in respect of the work to be carried out, the particular arrangement was made between (i) the payer and the partnership or (ii) between the payer and the individual, or

(b) the payer controls the work to be carried out by the individual such that there is an employer/employee relationship between the payer and the individual.

It is our view that lecturer's fees received by an individual would generally be received qua individual and not qua partnership.

3. Where an arrangement is made between a partnership and a payer for the provision of services, the payment to the partnership for such services in the form of stock options would be business income irrespective of who provides the services. In this case, section 7 of the Act would not be applicable and there would be no deduction under paragraph 110(1)(d) of the Act in respect of any stock option benefits earned by the partnership. Also, such amounts would be required to be reported on an accrual basis.

We trust these comments will be of assistance.

Yours truly,

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch