August 22, 1991
Dear Sirs:
Re: Committee Fees
This is in reply to your letter of July 17, l99l concerning the income tax status of certain fees paid or payable by an estate to a court appointed committee. You describe the following situation.
The financial affairs of a mentally or physically incapacitated individual are placed, pursuant to a court order, in the control of a committee\trustee. The committee has the court's direction and approval to deal with the financial affairs of the incapacitated person as if he were that person. Correspondingly, the committee is obligated to make a periodic report to the court on his stewardship of the assets under his control. The timing of the committee's report to the court will be at the discretion of the court and may cover one, two, three or more years of stewardship. The court reviews the committee's report and, if the financial reporting is acceptable to the court, the court passes the accounts and fixes the committee's remuneration at that time. In some cases, the committee's remuneration\compensation may be determined at times other than the passing of the accounts.
Generally speaking the committee's compensation is determined as follows:
i. 2.5% of every dollar received account of income or capital;
ii 2.5% of every dollars disbursed on account income or capital; and
iii. 2\5ths of 1% of the estate's assets under administration.
These rates of compensation are generally applied on an annual basis and it should be noted are not necessarily reflective of the relative efforts of the committee in fulfilling his responsibility.
While the courts generally follow these formulas for committee compensation, there is no assurance that the compensation, when awarded, will be pursuant to these formulas.
The fact situation which you set out is quite specific and it appears that it may relate to definite contemplated transactions. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. If you wish to obtain any binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling application should be submitted. If, on the other hand, your situation reflects factual historic occurrences, the determination with respect to the tax consequences under the Act would generally be carried out by personnel from your local District Taxation Office. We do, however, provide the following comments for your information.
1. A deduction respecting committee compensation expenditures would by virtue of paragraph 18(1)(a) of the Income Tax Act (the "Act") be limited to the portion considered to have been incurred for the purpose of earning income from a business or property.
2. The portion of the committee compensation relating to the purchase or disposition of investments would be included in the adjusted cost base or the cost of disposition to the extent the expenditures were made or incurred for the purpose of making the purchase or disposition as the case may be.
3. Without a specific provision in the Act providing for cash basis reporting, as there is for salary, wages, farming and fishing, committee fees would be required to be reported on the accrual basis.
4. In our view service income is generally required to be reported on an earned basis so that the income is matched to the year the services are rendered. Service income is considered to be earned when the service is rendered and since the courts generally follow the formulas described above the amount of the fees can be reasonably determined.
5. Committee compensation for services rendered on account of income receipts, which is paid on an annual basis pursuant to the above generally accepted schedule of compensation rates, would be deductible when paid notwithstanding the fact that such payments may be subject to adjustment at the time the estate's accounts are passed by the court.
6. Generally an expenditure is deductible in the year in which the amount can be reasonably ascertained and the liability is unconditional.
We trust our comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch