11 August 2010 External T.I. 2009-0346641E5 - Interest Income

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.

Principal Issues: Who should report the interest income earned from a fund owned by a group of contractors to cover their insurance deductible in the event of a major accident?

Position: Generally, the individual contractors.

Reasons: Based on the scenario presented.

XXXXXXXXXX
									2009-034664
									V. Srikanth
August 11, 2010

Dear XXXXXXXXXX :

Re: Interest Income

This is in response to your letter dated October 19, 2009, wherein you requested a ruling regarding the reporting of interest income earned on funds held in a financial institution.

Specifically, you wanted our view on the tax consequences in the following situation:

A group of individuals, who are owner-operator truck drivers (the "Contractors") of a trucking company (the "Contracting Company"), together set up a fund with a bank solely for the purpose of helping them financially to cover the deductible of their auto insurance, in the event of a major accident. The contribution to this fund is voluntary and the Contracting Company makes no contribution to it. The fund is held in trust and is owned and managed by the Contractors. The bank will issue a T5 slip to the Contracting Company's comptroller, for the income earned in this fund, since that individual is the primary person on the account.

You would like our views on who should report the income earned in this fund.

Our Comments

This appears to be an actual situation. It should be noted that written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled Advance Income Tax Rulings. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. If, however, the particular transactions are completed or partially completed, the enquiry should be addressed to the relevant Tax Services Office. Your request was not submitted in the format required for an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries which are not advance income tax rulings and we are prepared to provide you with the following comments.

The reporting of income accrued in a fund is a question of fact to be resolved based on all the facts of the situation and a review of the documents involved. It is also a question of fact whether a fund should be treated merely as a savings account, such that the contributors to the fund are not entitled to any deduction with respect to the contribution. However, there could be other tax consequences if it is determined that the contributors are entitled to claim a deduction against their income for the contributions they make towards a fund. We do not have enough information to further comment on this issue. The comments below are provided on the basis that the fund in the situation described above is strictly an investment vehicle that the Contractors contribute to.

Generally, in situations involving funds held by, or which may appear to be held by, an employer for the use or benefit of employees, the first issue to resolve is whether payments received from the fund would constitute a taxable employment benefit to the employees pursuant to paragraph 6(1)(a) of the Income Tax Act (the "Act"). However, in your situation, the Contractors are not employees and accordingly, the provisions of paragraph 6(1)(a) of the Act do not apply.

Further, where a fund is generally established for the purpose of earning income from property, and not for carrying on a business, in our view, the income earned in the fund will be taxable as interest pursuant to paragraph 12(1)(c) of the Act.

In situations where funds are 'held in trust', it needs to be resolved whether, in fact, a trust exists. If a trust exists, pursuant to paragraph 150(1)(c) of the Act, a T3 return will be required to report the income. Further, the income can either be reported in the trust or distributed to the beneficiaries and deducted by the trust pursuant to subsection 104(6). If the income has been distributed to the beneficiaries, each beneficiary will report the income received from the trust. We enclose severed versions of documents 2007-0233761 and 2002-017676, which reflect CRA's views on 'in trust' accounts.

Further, where there is an association of two or more persons, it needs to be determined if such an association is considered a partnership for income tax purposes. The three basic elements that are required for an organization to be considered a partnership are:

1. There must be two or more persons involved.
2. These persons must be carrying on a business.
3. The business must be carried on with a view to making a profit.

Where it is determined that the association is a partnership, then the income earned in the partnership may be allocated to the partners as determined by a partnership agreement. Where income earned in a fund is determined not to be an employee benefit and where there is no trust or partnership in existence, in our view, the association of persons contributing to the fund would likely be considered to be co-owners such that each owner has an interest in the property, i.e., the fund. In such a situation, income earned in the fund should be allocated among the participants on a reasonable basis, and they should each report their share of income on their respective T1 returns as interest.

Please be aware that in situations where the contributors are claiming a deduction against their income for the contributions they make to the fund, it is a question of fact whether they are entitled to the deduction. Further, there may be other tax consequences if any amount is distributed from the fund as claims or when the fund is collapsed and amounts are distributed.

We trust our comments will be of assistance to you.

Yours truly,

R.A. Albert, CA
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch