Principal Issues: [TaxInterpretations translation] Should the remuneration for services provided by a broker pursuant to the Real Estate Brokerage Act, which are carried out through a corporation, be included in computing the income of that corporation?
Position: Mixed question of fact and law. In this case, everything indicates yes.
Reasons: If the activities of a broker under the Real Estate Brokerage Act can be legally performed by a corporation - which appears to be the case - remuneration for the activities of the broker will be taxable in the hands of that corporation.
XXXXXXXXXX 2011-042336
October 17, 2011
Dear Mr. XXXXXXXXXX,
Subject: Exercise of broker activities through a corporation
This is in response to your letter dated October 4, 2011, concerning the activities of real estate and mortgage brokers in Quebec carried on through corporations. In particular, you referred to Chapter 40 of the Statutes of Québec 2010, passed on December 10, 2010, which amends various Québec legislative provisions, including the Real Estate Brokerage Act (the "REBA").
Pursuant to those amendments, a real estate or mortgage broker carrying on brokerage activities on behalf of an agency may carry on brokerage activities through a corporation that the broker controls. In such cases, the REBA now provides that the remuneration relating to the services provided by a broker while carrying on brokerage activities through a corporation belongs to the corporation.
You wish to know if the remuneration for the services that a broker provides while carrying on brokerage activities through a corporation under the REBA must be included in computing the income of that corporation for the purposes of the Income Tax Act.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you.
Chapter 40 of the Statutes of Québec, 2010 provides for the addition of Division IV of Chapter II, Articles 22.1 to 22.6, to the REBA. For the purposes of this letter, the following articles are of particular interest to us:
22.1. A broker’s licence holder acting on behalf of an agency may carry on brokerage activities, in accordance with the terms, conditions and rules set out in the Organization’s regulations, within a business corporation which he or she controls.
22.5. Subject to special authorizations from the Organization, a broker’s licence holder acting on behalf of an agency may carry on brokerage activities in Québec within a business corporation constituted under an Act other than an Act of the Parliament of Québec if he or she meets all the other conditions prescribed in this chapter.
The personal liability of the broker’s licence holder, including that relating to the obligations of the corporation, continues to be governed by the laws of Québec for all matters concerning brokerage activities carried on in Québec, as if the corporation had been constituted under an Act of the Parliament of Québec.
22.6. The remuneration relating to the services provided by a broker’s licence holder while carrying on brokerage activities within a business corporation belongs to the corporation.
As a general rule, as set out in Income Tax Technical News No. 22, if professionals are legally, whether contractually or by statute, precluded from assigning their commissions to a corporation, then the commission income must be reported by the professionals, and cannot be reported through a corporation, regardless of the documentation provided.
However, in the situation you have presented to us, if the activities of a real estate or mortgage broker under the REBA and other rules to be determined by regulation (footnote 1) can be lawfully exercised through a corporation - which appears to be the case here - remuneration for the activities of the broker will be taxable in the hands of that corporation.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnership Section
Income Tax Rulings Directorate
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 See Proposed Regulation Amending Regulation respecting brokerage requirements, professional conduct of brokers and advertising; Regulation amending Regulation respecting the issue of broker’s and agency licences; Regulation amending Regulation respecting records, books and registers, trust accounting and inspection of brokers and agencies; Regulation amending Regulation respecting the Real Estate Indemnity Fund and determination of the professional liability insurance premium.