3 August 1999 External T.I. 9909975 - INDIVIDUALS ASSIGNING COMMISSION TO CORP.

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: Whether subsection 56(4) applies where there unrelated real estate agents assign their commission income to a corporation which is owned equally by the three of them.

Position: Depends on the facts.

Reasons: The question of whether or not commission income “assigned” to a corporation is the corporation’s for income tax purposes will depend on, among other things, the particular fact situation, the terms of the agreement among the parties, and a consideration of any jurisdictional restrictions imposed by federal or provincial statutes. As regards subsection 56(4), in general terms, this provision applies where a taxpayer transfers or assigns a right to an amount to a person with whom the taxpayer does not deal at arm’s length. If persons are not related to each other, it becomes a question of fact whether such persons deal with each other at arm’s length. Paragraph 24 of IT-419R states that there is a general presumption that a shareholder deals at arm’s length with the corporation in which he or she holds shares if the shareholder does not control, nor is otherwise related to, such corporation. In this situation, a shareholder may still be considered not to be dealing at arm’s length with a corporation if he or she is a member of a group of shareholders who act in concert to control the corporation. Acting in concert means a predetermined agreement to act in a certain manner.

XXXXXXXXXX 		J. Gibbons
			5-990997
Attention:  XXXXXXXXXX 

August 3, 1999

Dear XXXXXXXXXX:

This is in response to your letter of April 9, 1999, in which you requested our views concerning the application of subsection 56(4) of the Income Tax Act to the hypothetical situation outlined in your letter.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only. Further, since this may be a completed transaction, we have forwarded a copy of this letter to the XXXXXXXXXX Tax Services Office. You should consult with them if you wish to obtain additional feedback on your specific situation.

You describe the following situation:

1. Three unrelated real estate salespersons have agreed to form a team whereby they will share all revenues and expenses on an equal basis.

2. None of these three individuals is a licensed real estate broker; therefore, their commissions are processed by another person who is a licensed real estate broker.

3. In order to simplify the administration of this business, the individuals have formed a corporation, with each individual owning 1/3 of the shares.

4. The commissions will be assigned to the corporation, and all expenses will be paid by the corporation

You are concerned that, if subsection 56(4) of the Act applies, the commission income will revert back to the individuals.

Our Comments

The question of whether or not the commission income “assigned” to the corporation is the corporation’s for income tax purposes will depend on, among other things, the particular fact situation, the terms of the agreement among the parties, and a consideration of any jurisdictional restrictions imposed by federal or provincial statutes. Certainly, a corporation can carry on a particular business, but the simple assignment of the individuals’ income to a corporation does not make it the corporation’s income. Further, if there are any restrictions that would prohibit a corporation from carrying on a particular business, these should be considered.

In general terms, subsection 56(4) applies where a taxpayer transfers or assigns a right to an amount to a person with whom the taxpayer does not deal at arm’s length. In the situation outlined in your letter, you felt that since none of the shareholders are related, subsection 56(4) would not apply. The criteria used to determine whether or not persons deal with each other at arm’s length is discussed in Interpretation Bulletin IT-419R, “Meaning of Arm’s Length.” If persons are not related to each other, it becomes a question of fact whether such persons deal with each other at arm’s length. Paragraph 24 of this bulletin states that there is a general presumption that a shareholder deals at arm’s length with the corporation in which he or she holds shares if the shareholder does not control, nor is otherwise related to, such corporation. In this situation, a shareholder may still be considered not to be dealing at arm’s length with a corporation if he or she is a member of a group of shareholders who act in concert to control the corporation. Acting in concert means a predetermined agreement to act in a certain manner. Therefore, the fact that the individual real estate agents in your example are not related would not, in and of itself, preclude the application of subsection 56(4) to the commission income assigned by them to the corporation.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

- 2 -