24 May 2007 External T.I. 2006-0209081E5 F - Withholding Source Deductions - Trustee Fees
Principal Issues: In a given situation, where each trustee of a trust will receive for his/her services (which will not be rendered in the course of the trustee's business) a fixed fee plus a fee per meeting of the trustees attended, whether the trust has to withhold income tax from the fees paid to the trustees?
Position: Yes.
Reasons: Long standing CRA position (T4001) under Estate executors or liquidators, and administrators and in paragraph 5 of IT-377R ARCHIVED.
XXXXXXXXXX 2006-020908 M. LeBlond
May 24, 2007
Dear Madam,
Subject: Trustee fees and paragraph 153(1)(g) of the Act
This is in response to XXXXXXXXXX's email of October 4, 2006, in which he asked for our comments on the above subject in relation to the situation described below. We apologize for the delay in responding to this request.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
The Situation
1. The individuals are the trustees (the "Trustees") of a REIT trust (the "REIT"). The Trustees manage the business and affairs of the REIT. The Trustees may also be employed by the REIT or by other entities.
2. The Trustees meet regularly on a quarterly basis. Other meetings not determined in advance may be held as required for management purposes.
3. The Trustees may render the following services to REIT, among others
(a) approve or reject proposed transactions, such as proposed acquisitions and dispositions of investments and borrowings
(b) review the financial statements
(c) review management's compensation,
(d) review the REIT's corporate governance practices, and
(e) administer the Long Term Incentive Plan.
4. The Trustees receive from the REIT a fee for their services and reimbursement of expenses as follows: (a) $20,000 per year, plus (b) $1,000 for each meeting of the Trustees attended in person and $500 for each meeting of the Trustees attended by telephone, plus (c) reimbursement by REIT for out-of-pocket expenses incurred in the performance of their duties as Trustees.
5. The Trustees do not receive their fees from the REIT in the course of a business.
Your Questions and Analysis
You asked whether, in the situation you have presented to us, the REIT should withhold income tax on the fees paid to its Trustees. Also, you wish to know if the REIT should issue a T4 or T4A to the Trustees for such fees.
In your view, in the particular situation, the REIT should not withhold tax on the fees paid to the Trustees but the REIT should issue a T4A to each Trustee, pursuant to section 200 of the Income Tax Regulations ("Regulations"). Your conclusions are based on the following analysis:
Paragraph 153(1)(g) provides that every person paying at any time in a taxation year fees, commissions or other amounts for services, other than amounts described in subsection 212(5.1), shall deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall, at the prescribed time, remit that amount to the Receiver General on account of the payee’s tax for the year under this Part or Part XI.3.
Sections 102 (Periodic payments) and 103 (Non-Periodic payments) of the Regulations refer to remuneration payments made to an employee by an employer.
Article 100 of the Regulations defines the term "remuneration" as including any payment that is in respect of salary or wages.
Subsection 248(1) of the Income Tax Act ("the Act") defines salary or wages as the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I and includes all fees received for services not rendered in the course of the taxpayer’s business.
Subsection 248(1) of the Act defines "office" as “the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration … and also includes the position of a corporation director.”
We note that the definition of office does not specifically include the position of trustee of a trust.
We are of the view that the fees paid to the Trustees cannot be considered as a fixed or ascertainable stipend or remuneration as the total amount to be paid to the Trustees is unknown at the beginning of each year. That is because the Trustees meet on an as-needed basis and, furthermore, the fees vary depending on whether the Trustees are present in person or by telephone. Consequently, the fees cannot be considered to be received as a result of the Trustees holding a position and therefore the relevant sections of the Regulations do not apply.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that 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. Nevertheless, we offer the following general comments which may not apply in full to the situation you have submitted to us.
In our view, in the situation you have presented to us, the REIT would be required to withhold tax from the fees paid to its Trustees and issue a T4 information slip to each of them in that regard. Our conclusions are based on the following observations.
The CRA's long-standing position on whether fees received by a trustee are income from a business or an office is stated in the "Employers' Guide -- Payroll Deductions and Remittances T4001 (Rev. 2006)" and in paragraph 5 of Interpretation Bulletin IT-377R Archived "Directors' Fees, Executor's Fees, and Jury Fees" (January 27, 1989), as follows:
Employers’ Guide
All other trustees
Fees paid to executors, liquidators, or administrators [trustees] are either income from office or employment or business income, depending on whether the executor or administrator [trustee] acts in this capacity in the regular course of business.
IT-377R Archived
Executor's Fees
5. A fee earned for the administration of an estate by an executor thereof will be treated either as income from a business or income from an office, depending on the particular circumstances of each case. Fees earned by a taxpayer for acting in the capacity of executor in the course of business form part of the business income of the taxpayer, and expenses incurred in this connection are deductible in the usual way in computing such income, to the extent they are not recoverable from the funds of the estate. Where the executor is a person who does not act in this capacity in the course of carrying on a business, the fee for acting as executor is considered to be income from an office. (Such a situation could exist even where the executor is a lawyer if the normal practice does not include executorships and the lawyer was appointed on personal grounds, perhaps because he or she was a friend or relative of the deceased.) [Emphasis added]
Subsection 153(1) requires very person paying at any time in a taxation year any of the amounts described in paragraphs 153(1)(a) to (t) to deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall, at the prescribed time, remit that amount to the Receiver General on account of the payee’s tax for the year under this Part or Part XI.3.
The following amounts are described in paragraphs 153(1)(a) and (g) respectively: "salary, wages or other remuneration" and "fees, commissions or other amounts for services".
The definition of "salary or wages" in subsection 248(1) provides that a taxpayer's income from an office or employment also includes all fees received for services not rendered in the course of the taxpayer’s business.
Also, it follows from the definition of "office" in section 248(1) that for a position held by an individual to constitute an "office", that position must entitle the individual to a fixed or ascertainable stipend or remuneration.
The Federal Court of Canada - Trial Division considered in E.F. Anthony Merchant v. The Queen, [1984] F.C.J. No. 92, Court No. T-3652-80, the meaning to be given to the expression "fixed or ascertainable stipend or remuneration", for the purposes of the definition of "office" in subsection 248(1), and made the following comments:
I am not convinced that at the time of taking office the taxpayer must know how much he will receive. It seems to me a per diem rate, or a specified amount per sitting renders the income sufficiently ascertainable to meet the definition in section 248(1).
In the situation you have presented, based on the long-standing CRA position noted above, the fees received by the Trustees would be considered income from an office or employment (i.e., "salary or wages" as defined in subsection 248(1)).
In our view, for the reasons set out above, the REIT would therefore be required to withhold tax from the fees paid to its Trustees by virtue of paragraph 153(1)(a) and to issue a T4 information slip to each of them in that regard.
We hope that these comments will be of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch