10 July 1984 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.

DATE JUL 10 1984

TO-A TORONTO DISTRICT OFFICE              FROM-DE HEAD OFFICE
     Chief of Audit                           Specialty Corporations
                                              Ruling Division
                                              Corporate Ruling Directorate
ATTENTION Mr. W.J. Robertson                  P.K. Tang
          Audit Review Section                Tel. (613) 995-1787
          Business Enquiries
          Group 148-1-4

RE XXXX

Brokerage Commission Income Salesman's Commission Expense

This is in reply to your memo of March 28, 1984 concerning the deduction of commission expense claimed by a stock brokerage company. We also acknowledge the receipt of additional information fpm Mr. P. Kwong - Chip of your office in this matter.

The question, as we understand it, is whether or nor XXXX is entitled to deduct commissions paid to their salesmen before the settlement date of the related transactions when XXXX records its income for tax purposes as of settlement date on the basis that this is in accordance with paragraph 11(d) of IT-133 . It is your view that IT-133 does not address itself to the issue of whether to report the gross or net revenue on settlement date and that generally accepted accounting principles should be applied.

We agree with you that IT-133 deals with the question of "disposition" of shares. In that IT, we take the position that there is a disposition and acquisition of shares traded on a Stock Exchange by the vendor and the purchaser, respectively, on the "settlement date". Our basis for this position is the definition of "disposition" of property specifically provided under paragraph 54(c) of the Act. It should be noted that this paragraph only has application for the purpose of taxable capital gain and allowable capital loss calculations under Subdivision c of Division B of Part I of the Act. It has no bearing on the calculation of income under subdivision a or b.

It is our view that the date that the salesmens' commissions are deductible by the company depends on its contractual obligations under its employment arrangements with the salesmen. It would not, in our view, depend on the date an investor is considered to have disposed of or acquired his shares, i.e., the settlement date. Although we have not been provided with any employment contracts with your submission we would be inclined to believe that the company normally would not be obliged to pay a commission to its salesmen until an enforceable sale has been effected, which, as indicated below, would probably be the "transaction date". Hence, it would be reasonable to allow the deduction to the company of salesmen commission expenses accrued on the "transaction date".

The commission income earned by a broker for services rendered to a purchaser or a vendor of shares is income from business and is not a capital gain and as such should not be governed by rules relating to the measurement and timing of capital gains and capital losses. Therefore, for the purpose of determining the date a broker should include, in computing its income, the commission earned from trading of shares for its clients we should not necessarily rely on the date of disposition as defined under paragraph 54(c) (the settlement date). In our view, any commission earned by a stock broker would be properly includable under paragraph 12(1)(b) of the Act. The question, hence, is at what point in time the amount has become receivable; i.e., on what day was the account in respect of the services rendered or would it have been rendered had there been no undue delay in rendering it.

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a client is required to pay the brokerage company (the company") the commission on the securities bought and sold. Hence, it would appear that the commission would become receivable to the company once the securities were "bought" or "sold" and the amount should be included in computing the income of the company on the day upon which the account in respect of such services became receivable pursuant to paragraph 12(1)(b) of the Act.

We have made a review of the by-laws of the Toronto Stock Exchange and have noted the following provisions governing the rules on the trading of shares by its members.

"11.08 All bids and offers made and accepted in accordance with the Exchange requirements shall be binding and all Exchange contracts thereby effected and arising therefrom shall be subject to the exercise by the Exchange of the powers in respect thereto vested in the Exchange."

"16.07 A member that has acted in the purchase or sale of a security upon the Exchange shall promptly send or deliver to his customer, if any, a written confirmation of the purchase or sale setting forth the following:

       (a) the quantity and description of the security, and,where the security
           is a restricted share, the description of the security shall include
           the appropriate restricted share term or an abbreviation thereof,
           provided that an explanation of the abbreviation shall appear on the
           confirmation;

(b) the consideration;

(c) whether the member was acting as principal or agent;

       (d) if acting as agent, the name of the member from or to or through
           whom the security was bought or sold;

(e) the day upon which the purchase or sale took place;

(f) the commission, if any, charged in respect of such purchase or sale;

       (g) the name of the Registered Representative or other person instructed
           by the customer to make the purchase or sale; and

(h) that the purchase or sale took place upon the Exchange."

"11.05(1) Upon agreement to a transaction on the floor, the selling attorney
          shall complete a floor slip in the form from time to time prescribed
          by the Exchange and in the manner from time to time required by the
          Exchange. The floor slip shall be initialled by the selling 
          attorney and by the buying attorney and immediately thereafter filed by
          the buying attorney at the post upon which the security is posted
          for trading. The exchange may determine any trade to be invalid if
          the floor slip is not completed in substantial compliance with this
          section.

      (2) Any member whose attorney or attorneys on the floor fail to complete
          a floor slip or slips in accordance with the requirements of 
          subsection (1) may be charged for the. costs of correction thereof at a
          rate prescribed from time to time by the Exchange."

From the above, it would appear to us that a contract for the purchase and sale of a security is effected once the floor traders, who act as agents of the vendor and the purchaser, have initialled the "floor slip". Each broker is required to send to his customer a written confirmation of the purchase or sale outlining the essential details of the transactions. All bids and offers made and accepted in accordance with the Exchange requirements are binding between the parties and all Exchange contracts arising therefrom are subject to the exercise of the powers vested in the Exchange.

In our view, a respectable agrument could be made that the written confirmation, sent by the company (the broker) to its cusomters outlining the details of the transactions is "an account in respect of services" since it includes the details of the transaction and the commission charged. Hence, pursuant to paragraph 12(1)(b) of the Act, any commission earned with respect to such services should be included in computing the income of the company on the day such confirmation was sent to the customers (probably the "transaction date") or the date it would have been sent if there had been no undue delay.

On this basis, the deduction of the commissions paid (or payable) to the salesmen computed as of the transaction date would satisfy the matching principle requirements of generally accepted accounting principles.

We have discussed this issue with the staff of the Audit Applications Section of our Audit Directorate. They are in agreement with the view expressed above. However, because of the emphasis on the settlement date taken in IT-133 Audit Applications Section will contact the XXXX with a view to clarifying our position on the issue.

Therefore, in reply to your referral, we recommend that your office hold the file in abeyance until the Audit Directorate staff have completed their review of the problem. It is our understanding that once the review of the problem is completed the Audit Directorate staff will inform all District Offices of their position and advise them of any specific assessing instructions necessary.

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR D.B. MORPHY

Chief Services Public Utilities and Exempts Corporations Specialty Corporations Rulings Division Legislation Branch