31 January 2008 External T.I. 2007-0249051E5 - Taxation of Indirect Payments

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: The proper taxation of amounts that are received by a trade union from various third-party contractors.

Position: Subsection 56(2) does not apply.

Reasons: The law based on application to the specific facts.

XXXXXXXXXX 							Michael Cooke
								2007-024905
January 31, 2008

XXXXXXXXXX :

Re: Taxation of Indirect Payments

We are writing in response to your letter of November 2, 2006, wherein you requested our views on the taxation of certain amounts under the Income Tax Act ("the Act") that are received by the XXXXXXXXXX ("Union") from various third-parties ("Service Contractors").

Briefly, we understand from your letter that the Union is a labour organization within the meaning of paragraph 149(1)(k) of the Act. The Union is the exclusive bargaining agent for its members ("Members") who are self-employed individuals. The Union has entered into a master collective agreement ("Collective Agreement") with the Service Contractors. The Collective Agreement governs matters pertaining to the hiring of Members by the Service Contractors, such as working conditions, minimum pay scales (but not maximum pay), overtime, meals, rest periods and travel expenses. A Service Contractor can directly engage the services of a Member by entering into a separate service contract with the particular Member; however, the terms of such a separate service contract cannot violate the terms of the Collective Agreement.

The Union has established a trust fund arrangement ("Trust") for the purpose of providing various insured health and welfare benefits and retirement benefits (the "Benefits") to the Members. We understand that when the Trust provides the Benefits to its Members, the amount or value of these Benefits is reported on a T3 slip.

Pursuant to the terms of the Collective Agreement, a Service Contractor is required to contribute XXXXXXXXXX% of the gross compensation paid to a Member (referred to as an "Insurance Contribution") and another XXXXXXXXXX % of the gross compensation paid to a Member (referred to as a "Retirement Contribution") to the Union when the particular Service Contractor engages the services of a Member. Pursuant to the terms of the Collective Agreement, neither the Insurance Contribution nor the Retirement Contribution (collectively referred to as the "Mandatory Payments") reduce, or otherwise get deducted from, the amount of gross compensation that the Service Contractor may otherwise be required to pay to a member under its separate service contract with the particular Member.

The Mandatory Payments are treated as income of the Union and as noted above, the Union uses these amounts to fund its obligation to provide the Benefits to the Members via the Trust. However, you have advised that some Service Contractors treat the Mandatory Payments as additional compensation of the Members. In those situations, the particular Service Contractor reports the amount of the Mandatory Payments on the T4A reporting slip that is issued to the particular Member.

It is your view that because the Mandatory Payments do not form part of a Member's total gross compensation, such amounts should not be included as "other income" in Box 28 of the T4A slip. You are concerned that because both the Trust and the Service Contactor issue reporting slips to the Members in respect of the Benefits or Mandatory Payments, as the case may be, there is potential for double taxation.

Our Comments:

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 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we are prepared to provide the following comments, which may be of assistance to you.

A discussion as to whether a particular Member is an employee (a contract of service) or self-employed (a contract for services) is beyond the scope of this response since we have no factual details concerning any particular work arrangement. As such, our comments are based on the assumption that the Members are self-employed and that sections 5 and 6 of the Act do not apply.

Since the Mandatory Payments were not actually paid to the Members, the application of subsection 56(2) of the Act should be considered. Subsection 56(2) of the Act provides, inter alia, that "a payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to the taxpayer." Essentially, subsection 56(2) of the Act is intended to apply in circumstances where a taxpayer attempts to avoid paying tax on an amount that would otherwise be included in the taxpayer's income under another provision of the Act, by directing that the amount be paid to another taxpayer.

The courts have found that the following four preconditions need to be met in order to apply subsection 56(2) of the Act:

(1) there must be a payment or transfer of property to a person other than the taxpayer;

(2) the payment or transfer must be at the direction of or with the concurrence of the taxpayer;

(3) the payment or transfer must be for the taxpayer's own benefit or for the benefit of some other person on whom the taxpayer desired to have the benefit conferred; and

(4) the payment or transfer would have been included in computing the taxpayer's income if it had been received by him instead of the other person.

In the above-described fact situation, although it appears that the first, third and possibly the fourth preconditions have likely been met in respect of the Mandatory Payments, it is not clear that the second precondition has been met. It might be argued in this particular situation that there was never any intention to divert any income that would otherwise be earned by a Member to the Union (or the Trust). In paragraph 4 of IT-335R2, the Canada Revenue Agency stated:

"Except as indicated in paragraph 9 with respect to dividend income, a taxpayer to whom subsection 56(2) applies need not be legally entitled to the property paid or transferred but must have some degree of control over its payment or transfer. Thus a shareholder who does not specifically direct a payment that falls under subsection 56(2) to be made but acquiesces in its payment will be taxable on the portion of the payment equal to the proportion of the number of shares owned by the shareholder to the total number of shares. Whether or not a shareholder will be viewed as having acquiesced in the payment will depend on the facts of the particular case [emphasis added]."

As noted above, pursuant to the terms and conditions of the Collective Agreement, the Service Contractors must pay the Mandatory Payments to the Union. While it might be argued that the Members have indirectly acquiesced to the redirection of these amounts simply by joining the Union, no Member appears to have any control over the payment of these amounts to the Union. Moreover, based on the terms of Collective Agreement, it appears that there was no intent for these Mandatory Payments to be treated as additional compensation of the Members since the payment of these amounts does not reduce any Member's gross compensation. As noted above, the Mandatory Payments are considered to be income of the Union. As such, there appears to be a respectable argument that there has been no attempt to divert income from the Members (with their concurrence or direction) to the Union even though the Union has entered into a separate arrangement (via the Trust) to use these amounts to provide the Benefits to its Members. In the above-described circumstances, Mandatory Payments paid to the Union by the Service Contractors should not be included as "other income" in Box 28 of any T4A that is otherwise issued to a Member by a Service Contractor.

We trust that our comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch