Principal Issues: Clarification regarding technical interpretation 2012-0472211I7
Position: See document.
Reasons: See document.
XXXXXXXXXX 2014-054793 I. Landry March 30, 2016
Dear Madam,
Subject: Clarification of Technical Interpretation 2012-0472211I7
This letter is in response to your e-mail of September 29, 2014 in which you requested clarification regarding Technical Interpretation 2012-0472211I7 (the "Technical Interpretation"). We apologize for the delay in responding to your request.
Our responses are based on the facts and assumptions described in the Technical Interpretation and we use the same abbreviations in this document to describe the different parts of the transactions that are used in the Technical Interpretation.
Unless otherwise indicated, all legislative references are references to the provisions of the Income Tax Act (the "Act").
First Clarification
You first requested clarification regarding the amount that must be included in computing the income of Travellers [individuals who are offered an annual free trip] who render their services to the Taxpayer through a corporation or through a sole proprietorship, and the issuance of T4A slips - Statement of Pension, Retirement, Annuity and Other Income to these Travellers.
You are of the view that the determination of the amount to be included in computing the income of these Travellers should be made by the Taxpayer and that the amount should be entered on a T4A slip- Statement of Pension, Retirement, Annuity and Other Income.
Following the receipt of your question, we have revised our comments on this subject in the Technical Interpretation and we hereby wish to make the following clarifications.
Travellers who render services to the Taxpayer through a sole proprietorship
As stated in the Technical Interpretation, we are of the view that the value of a trip constitutes business income for such Travellers which is to be included in computing their income under section 9.
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. However, there is no definition of "profit" in the Act. The Supreme Court of Canada considered the concept of "profit" in Canderel Limited (footnote 1) and stated, inter alia, that, in order to determine its profit for a taxation year for the purposes of section 9, a taxpayer must adopt any method which is not inconsistent with the Act or established case law principles or “rules of law,” which conforms with well-accepted business principles and which provides an accurate picture of the taxpayer’s profit for the given year. The determination of income must be made by the Travellers and not by the Taxpayer.
As part of the revision of our comments made in the Technical Interpretation, we cancel the following paragraph of the Technical Interpretation:
“A taxpayer may argue that the business portion of the trip does not have to be included as income and that such a method would accurately reflect the taxpayer's income. However, since this determination is a question of fact, we cannot take a position on this subject in the context of this case."
and replace it with the following:
In determining the taxpayer's profit for a taxation year for the purposes of section 9, the Canada Revenue Agency generally expects, in a situation similar to that described, that the taxpayer will include the value of the business part and the personal part of the trip. The determination of profit, however, is a question of fact and of law on which we cannot pronounce definitively within the framework of the current situation.
Paragraph 153(1)(g) provides that any person who, in a taxation year, pays fees, commissions or other amounts for services, other than amounts described in subsection 115(2.3) or 212(5.1), will deduct or withhold from the payment the amount determined in accordance with prescribed rules.
Subsection 200(1) of the Income Tax Regulations (the "Regulations") provides that every person who makes a payment described in subsection 153(1) of the Act (including an amount paid that is described in subparagraph 153(1)(a)(ii) of the Act) must make an information return in prescribed form in respect of the payment unless an information return in respect of the payment has been made under sections 202, 214, 237 or 238 of the Regulations.
In this situation, the Taxpayer must issue a T4A slip- Statement of Pension, Retirement, Annuity and Other Income ("T4A slip") for these Travellers and enter the value of the trip in Box 154 of the T4A slip.
Travellers who render their services to the Taxpayer through a corporation
According to our understanding of the situation described, it appears that the Taxpayer is responsible for paying for the trip and that the Taxpayer awards the trips directly to the Travellers without any intervention from the corporation. If our understanding of the situation is accurate, the Taxpayer is directly paying non-monetary compensation to an employee or shareholder of the corporation.
If the benefit has been conferred by the Taxpayer on a Traveller as an employee of the corporation, the amount to be included in computing the employment income would be included under paragraph 6(1)(a) and the comments in Interpretation Bulletin IT470R-CONSOLID - ARCHIVED - Employees' Fringe Benefits could be applicable.
In summary, as stated in paragraph 200(2)(g) of the Regulations, any person who confers a benefit the value of which is required by paragraph 6(1)(a), (e) or (h) or subsection 6(9) of the Act to be included in computing a taxpayer’s income from an office or employment, must make an information return in prescribed form in respect of such benefit except where subsection (3) or (4) applies with respect to the benefit. In the particular situation, the amount to be entered by the Taxpayer in Box 154 of the T4A slip is the amount of the benefit.
If the benefit instead is conferred by the Taxpayer on a Traveller as a shareholder of the corporation, the amount to be included in the shareholder's income would be included by virtue of subsection 15(1).
Second Clarification
Finally, you asked for clarification regarding Question 9 of the Technical Interpretation, which you believe should refer to paragraph 5 of the Interpretation Bulletin IT357R2 - ARCHIVED - Expenses of training.
That paragraph reads as follows:
"Generally speaking, expenses incurred to attend courses given outside the general geographic territory of a taxpayer are deemed to be unreasonable only if they are higher than they would have been if a similar course were given in that territory. The Minister can therefore question the deductibility of expenses incurred for a course taken at a remote location or in a tourist region. If the course followed in such a location was of relatively short duration and coincided with personal vacations, this may mean that the expenses incurred, or a fraction thereof, are not deductible training expenses but rather personal expenses. Expenses incurred for a course taken outside the North American continent are considered unreasonable, to the extent that they are higher than would have been the case if such training were offered in North America. Expenses incurred to attend a course outside the territorial boundaries of the sponsoring professional association are generally considered to be unreasonable, to the extent that they are higher than they would have been if the training were offered within the territorial boundaries."
Paragraph 5 refers to the deductibility of expenses incurred by self-employed workers. We did not refer to this paragraph in the Technical Interpretation because in this situation the Travellers did not incur any expenses in connection with their travel.
We hope that our comments will be of assistance.
Best regards,
Michel Lambert, CPA, CA, M. Fisc.
Manager
Employment Income Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch
c.c. XXXXXXXXXX TSO, Audit Division
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 98 DTC 6100