Principal Issues: The taxability and reporting requirements concerning director's remuneration in various situations.
Position: General comments. See response.
Reasons: Mixed questions of fact and law.
XXXXXXXXXX 2010-036778 Michael Cooke, C.A. July 28, 2010
Dear XXXXXXXXXX :
Re: Director Fees
We are writing in response to your correspondence that we received on May 18, 2010, about the withholding and reporting obligations on amounts paid in respect of services rendered by an incorporated non-profit organization's (the "Organization") board of Directors members under the Income Tax Act (the "Act") in the following three distinct fact situations:
1. A board member requests that his or her director fees from the Organization be paid directly to an approved cancer charity.
2. A board member irrevocably waives his or her right to receive such director fees.
3. A board member directs that such director fees be paid directly to his or her personal corporation or sole proprietorship.
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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
As we discussed (Cooke/XXXXXXXXXX), for tax purposes director fees are taxable as income from an office or employment. Where an individual directs that an amount of remuneration from an office or employment be paid directly to a charity, subsection 56(2) of the Act will apply to include that amount in the employment income of that individual in the same manner as if it were paid directly to the individual. The payer of the remuneration would still be required to comply with any withholding and reporting obligations under the Act in respect of such remuneration even where the remuneration has been paid to a third party such as a registered charity. However, where an amount of remuneration is paid to a registered charity the particular individual might be entitled to claim a non-refundable tax credit under subsection 118.1(3) of the Act provided the amount is considered to be a charitable gift. As described in Interpretation Bulletins IT-110R3, Gifts and Official Donation Receipts and IT-297R2, Gifts in Kind to Charity and Others, a charitable gift will generally be considered to have been made where the transfer is voluntary and is made without expectation of return by the donor.
Notwithstanding the above, where an individual who is a director or other officer of a non-profit organization, agrees to irrevocably waive an amount of remuneration that he or she is otherwise entitled to receive, perhaps for philanthropic reasons (i.e., with the effect that the particular individual is essentially providing his or her services to the non-profit organization on a purely voluntary basis), the CRA is generally prepared to not apply subsection 56(2) of the Act in such circumstances provided the particular individual is not otherwise able to direct or influence how such waived remuneration is to be spent by the particular non-profit organization. In such a situation, the amount of such waived remuneration would not be subject to the withholding and reporting requirements under the Act and the individual would not be entitled to claim a non-refundable tax credit under subsection 118.1(3) of the Act if the amount was ultimately contributed to a registered charity by the non-profit organization.
Finally, we note that many corporate law regimes require that corporate directors and officers be individuals who act in their personal capacity. For tax purposes, therefore, it would not be possible for such an individual to transfer or assign income earned from performing such duties to his or her personal corporation, nor would it be possible to have such income treated as business income for income tax purposes. Consequently, such remuneration continues to be treated as income from an office or employment for the purposes of the Act and subject to the withholding and reporting obligations under the Act.
We trust our comments will be of assistance.
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch