29 October 1980 Income Tax Severed Letter

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.

XXXX

M. Evans

October 29, 1980

Dear XXXX

This is in reply to your letter of September 22, 1980 requesting our interpretation for income tax purposes of the following arrangement between a medical doctor and his spouse:

1. The spouse carries out secretarial and managerial duties in her home, owed solely by herself.

2. She receives a monthly fee from her husband, who is her only client.

3. Her taxable income is calculated by deducting the following expenses from fee income:

- carrying costs of an office in the spouse's home - business portion of automobile operating expenses and capital cost allowance - accounting and auditing fees - bank charges of spouse's business account - business telephone system - office supplies - capital cost allowance on office equipment valued at over $200.

The question is whether the spouse is self-employed or an employee of her husband. Paragraph 251(1)(a) of the Income Tax Act (the "Act") deems related persons not to deal with each other at arm's length. In the situation in question, the parties can be said to be acting in concert without having separate interests and the husband's authority and influence gives his effective control over any transactions. Consequently, the spouse would not be considered to be self-employed but, in our opinion, an employee of her husband, notwithstanding that her remuneration is in the form of a fee.

Having thus concluded, it is our further opinion that the provisions of subsection 74(3) of the Act are applicable to the arrangement under consideration which would exclude the fee from the wife's income and preclude its deduction from her husband's income.

It should however be noted, that if subsection (1) of section 36 of the Draft Amendments to the Income Tax Act is enacted into law, subsection 74(3) of the Income Tax Act will be repealed applicable with respect to the remuneration paid after 1979 for services rendered as an employee after 1979.

We regret our reply could not be more favourable.

Yours truly,

for director Non-Corporate Rulings Division

s. 73(4) 251(1)(a) 245(1)