Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Treatment of vehicles provided to sales agent's.
Position: Taxable as commission income.
Reasons: The vehicle is an incentive based on volume of sales reached by the agent. Agents can receive cash or a vehicle. The incentive fits in to the ordinary meaning of the word commission, as an amount fixed by reference to volume of sales made and therefore must be included in income in the same manner as commissions paid in cash.
December 21, 1999
Toronto North Tax Services Office HEADQUARTERS Benefit and Employment David Shugar Income Audit 957-2134
Attention: Barkat Moosa 7-991537
XXXXXXXXXX
We are writing in response to your memo dated June 4, 1999 concerning the tax treatment of certain incentives offered by XXXXXXXXXX (the "Company"), through its distributorships, to sales agents meeting certain sales targets.
Your main concern lies with the XXXXXXXXXX (the "Car Program"), under which minivans are made available to sales agents qualifying as executive managers. Based on the information provided, and our telephone conversations with the Financial Director of the Company (Antle/Hurwitz; Shugar/Hurwitz), we understand that the Company sells its products through approximately XXXXXXXXXX distributorships. Each distributorship has its own sales force comprised of sales representatives of different levels: sales agents, unit managers, and executive managers. Sales representatives are encouraged by the Company to recruit new people into the sales force. One's position and compensation is dependent on the volume of sales, and compensation is based on a combination of personal sales and sales made by subordinate recruits.
As an incentive, sales representatives who reach a monthly sales target at the executive manager level are given the choice of receiving either a $XXXXXXXXXX cash payment, or the use of a vehicle for the month. The sales representative continues to receive the incentive, as long as the monthly sales target continues to be met. In exceptional cases, such as personal circumstances or seasonal fluctuations, a sales representative may keep the vehicle, notwithstanding that the monthly sales target was not met. In this letter we will refer to the sales representative who receives the incentive as the "agent. Sales representatives do not enter into any contract with the Company regarding compensation or incentives. They may enter into agreements with their distributor, but that is up to each distributor and the Company does not receive copies of, and is not aware of, any such agreements.
The cost of the incentive program is shared between the Company and the distributor to whom the agent reports. Distributors file sales reports with the Company. If an agent chooses to receive $XXXXXXXXXX for each month the target sales level is reached, the Company pays the agent's distributor approximately $XXXXXXXXXX per month towards the cost of the incentive. The distributor then pays the agent $XXXXXXXXXX per month.
When a vehicle is assigned to an agent, other than arranging its delivery to the agent, the distributor has no involvement with the vehicle. The Company leases and insures a fleet of approximately XXXXXXXXXX vehicles for use in their Car Program. Distributorships reimburse the Company $XXXXXXXXXX per month for each vehicle assigned to an agent.
Our Comments
As your request does not relate to a specific factual situation, and we have had to make several assumptions, we are only providing general comments regarding commission income and income from a business.
For purposes of this letter, we are assuming that sales representatives operating below the distributorship level are self-employed individuals, carrying out a business with a reasonable expectation of profit. The issue of whether, in fact, sales representatives are employees or self-employed should be resolved by CPP/EI Rulings. We also assume the agents are legally entitled to receive the incentive upon reaching the target sales level, whether or not there is a contract in place regarding the incentive. Based on our conversations mentioned above, we understand that the Company conducts its business only with the XXXXXXXXXX distributorships across the country and the Company has no direct contact or dealings with sales representatives below that level. We understand that all orders for merchandise are made by the distributors and sales representatives' commissions are paid by the distributors.
Subsection 11(1) of the Act states that, subject to sections 34.1 and 34.2, where an individual is a proprietor of a business, the individual's income from the business for a taxation year is deemed to be the individual's income from the business for the fiscal periods of the business that end in the year.
An agent earns the incentive when a target sales volume is reached. In our view, the incentive is a commission or other similar amount, fixed by reference to volume of sales made, and is required to be included in the income of the agent who earned or received the amount. This is the case whether the incentive is paid in cash, or by providing a vehicle to the agent. In our view, where a vehicle is provided to the agent, the value of the use of the vehicle is in respect of commissions earned by the agent and would be included in the business income of the agent.
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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