19(1)
We are writing in reply to your letter of January 21, 1991 wherein you requested our interpretation of the meaning of the word "commission" relative to the phrase "commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated" for purposes of subparagraph 8(1)(f)(iii) of the Income Tax Act (the "Act") as it relates to the situation described in your letter.
As we understand it, a company's consultants are remunerated on the basis of a combination of base salary and an annual incentive payment which is based on the achievement of predetermined sales targets, personal utilization rates and on qualitative management criteria.
The target levels for each of these categories are set annually by the company for each consultant. No incentive payments are paid to any employees unless the company achieves a predetermined annual level of overall profitability.
24(1)
In other words, the incentive payment represents a percentage of a percentage of the employee's base salary.
Since, in your view, the incentive payment is based in part on sales volume and varies in proportion to sales, you have requested that we confirm your view that these amounts would be considered "other similar amounts" for purposes of subparagraph 8(1)(f)(iii) of the Act.
As the "utilization" component in this incentive payment is calculated as chargeable client service hours divided by standard work hours and chargeable client service hours translate roughly into revenue, you have also requested that we confirm your view that this amount is also a commission for purposes of subparagraph 8(1)(f)(iii) of the Act.
Our Comments
It is our view that remuneration paid to employees pursuant to the formula described in your letter as summarized above, would not qualify as "commissions or other similar amounts" as envisioned by subparagraph 8(1)(f)(iii) of the Act as those terms are ordinarily understood and defined.
Black's Law Dictionary (5th edition) defines "commissions" as follows:
"The compensation or reward paid to a factor, broker, agent, salesman, bailee, executor, trustee, receiver, etc., usually as a percentage on the amount of his transactions or the amount received or expended"
The Shorter Oxford Dictionary defines commission as
"a prorata remuneration for work done as agent."
The incentive payment arrangement described in your letter, computed in accordance with the complex formula, represents what appears to be some form of profit sharing, bonus or similar style of plan that would not fit any of the above definitions. The fact that no amounts can be paid to anyone unless overall profitability is achieved, coupled with the fact that payments are based on a percentage of a percentage of base salary, further supports the view that the incentive payments are not commissions or an amount similarly determined, as required under subparagraph 8(1)(f)(iii) of the Act.
We trust that our comments are of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch