Principal Issues: Can directors' fees be included in the income of a personal service corporation without withholdings under 153(1)(a)? Can directors' fees be included in the income of a non-resident partnership or a non-resident corporation without withholdings under 153(1)(a), but subject to 15% withholding by virtue of 153(1)(g) and Reg. 105?
Position: No
Reasons: Director's fees are taxable to a director under 6(1)(c) and are subject to withholding under 153(1)(a) except as administratively contemplated in IT-377R.
XXXXXXXXXX 2006-019314 B. J. Skulski October 30, 2006
Dear XXXXXXXXXX:
Re: Request for a Technical Interpretation - Withholding Requirements Under the Income Tax Act on Payments of Directors' Fees to a Partnership or a Corporation
This is further to your letter of June 22, 2006 and your subsequent representations regarding the requirement to withhold income tax under subsection 153(1) of the Income Tax Act (the "Act") from payments made at the direction of a corporate director to a partnership or another corporation in respect of that director's fees.
In the foregoing letter you describe four concentric scenarios, which progressively build on each other in terms of the tax treatment of directors' fees. Rather than describe scenarios in detail, suffice it to say that they all inherently share a common dependence on the administrative position articulated in paragraph 4 of Interpretation Bulletin IT-377R, "Director's, Executor's or Juror's Fees", dated January 27, 1989. Indeed, if the scenarios were to fall outside the parameters of that administrative position they would fail.
The overriding principle in the tax treatment of a director's fees is that they relate to services rendered in the course of, or in relation to, the position of an "office" as defined in subsection 248(1) of the Act. Accordingly, paragraph 6(1)(c) of the Act requires that the fees be included in computing the income of the director. Moreover, pursuant to paragraph 153(1)(a) the corporation paying the fees is required to withhold and remit income tax in accordance with the prescribed rules.
The policy position stated in paragraph 4 of Interpretation Bulletin IT-377R is an administrative departure from the foregoing tax treatment of directors' fees. In this regard, the policy is an administrative accommodation, which under certain circumstances permits the fees to be considered to be the income of a partnership or corporation and not that of the individual director. Those circumstances may arise where the individual is acting on behalf of or representing a partnership or corporation as a director and the fees in respect of such services are paid directly, or turned over by the individual to the partnership or corporation.
The policy was developed with the implicit intent of providing an accommodation within strict limits and there was never the intention to provide a platform for tax planning. But for the limited exception, the fees are the income of the individual director, which has been earned in Canada and is subject to Canadian income tax. The administrative accommodation does not contemplate inclusion of the fees in the income of a personal service corporation or moving the income off-shore subject only to non-resident withholdings.
The development of any administrative policy requires adherence to the principle that the law be applied fairly, uniformly and without prejudice or preference to any one person. The integrity of the tax administrator in this sense is a vital component in contributing to the ongoing economic and social well-being of Canadians. On the other hand, if the revenue administration were to permit its administrative policies to be interpreted so as to encourage tax planning, it would be abetting in the migration of the burden of funding the cost of government services onto the shoulders of the payers of employment taxes.
We trust that our comments will be of assistance to you.
Yours truly,
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch