Principal Issues: [TaxInterpretations translation] What is the tax treatment of door prizes and prizes from staggered draws that are paid to owners of brokerage offices and their employees?
Position: Where the prizes are paid to the owners of the brokerage offices, the prizes will be required to be included in computing income from a business. Where prizes are paid to employees, the prizes will be required to be included in computing income from employment.
Reasons: Prizes are derived either from carrying on a business or from an office or employment.
XXXXXXXXXX 2010-035714
September 28, 2010
Dear Madam,
Subject: Door prizes and draws
This is in response to your letter of February 10, 2010, in which you requested our opinion regarding the tax treatment to be given to door prizes and awards paid as a result of draws.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
More specifically, you described a situation where XXXXXXXXXX (the "Taxpayer") deals with a network of brokerage offices. The Taxpayer pays those offices commissions based on the sale of various insurance contracts. As described below, the Taxpayer has paid various prizes to the owners of the brokerage offices and their employees.
Firstly, as part of a social activity, the Taxpayer awarded a door prize worth $1,500 to one of the employees of a brokerage office. The contest was addressed to the owners of the brokerage offices and their employees. As well, as part of a promotional activity, the Taxpayer organized draws spread over several months and offered brokerage office owners and their employees prizes ranging from $500 to $2,500 in cash or in the form of a travel certificate.
You wish to know what tax treatment should be given to these various prizes and, to the extent that they would be taxable, how those amounts should be reported. You also wish to know whether the tax treatment of the door prize would change if it were paid in a form other than cash.
For the purposes of our response, we have assumed that the prizes were not paid out to employees under a lottery scheme since the chance of winning the prizes in this case was received entirely free of charge. We provide a definition of the term "lottery" in paragraph 3 of IT-213R, Prizes from Lottery Schemes, Pool System Betting and Giveaway Contests.
Our Comments
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documentation to the appropriate tax services office for its opinion. However, we can offer the following general comments that may be helpful.
Paragraph 6(1)(a) provides that the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment must be included in computing the taxpayer's income from the office or employment.
Similarly, subsection 9(1) provides that a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.
Where a prize has been won otherwise than in a lottery or pool system betting - as is the case here - the prize will be received as income if it is derived from the employment of the person receiving the prize (the "recipient"), if it is derived from the recipient's business, or if it is received as a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer specific to the recipient by virtue of paragraph 56(1)(n).
In this case, we are of the view that the door prize will be required to be included in computing the income of the employee who received it, pursuant to paragraph 6(1)(a). This conclusion remains the same where the prize is paid in a form other than cash. With respect to prizes awarded to owners of brokerage offices and their employees under draws held over a period of several months, it is our view that these prizes will be required to be included in the income of the owners and employees receiving them pursuant to subsection 9(1) and paragraph 6(1)(a), respectively.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.