R.B. Day (613) 957-2136
NOV 23 1987
We are writing in reply to your letter of August 20, 1987, wherein you requested our views as to whether or not real estate salespersons would be in receipt of taxable benefits from their employers in situations where a portion of the sales commission is waived when these salespersons sell or buy their homes using their employer as broker.
Our understanding of the two situations set out in your letter is as follows:
1. Sale of Home by Employee
Generally where an employee-salesperson is the vendor of a house listed with the employee's company (i.e. the listing broker), the company agrees to "waive" 8% of the normal commission charged by the listing broker.
The normal commission structure is that 3% commission is paid by the vendor to the selling broker and 3%, to the listing broker. Of the 3% paid to the listing broker 50%,' is paid through as commission to the listing salesperson.
Where a salesperson is the owner of a listed home, the company does not invoice the employee for the 50% of the listing broker's commission normally paid out to the listing salesperson (in this case the employee) nor do they invoice the employee for the "profit" portion of the company's 50%. The employee, therefore, only pays a commission of 3% to the selling broker and 20% of the listing broker's commission to that broker (in this case the employer).
2. Purchase of Home by Employee
The vendor of the house (a third party) will be liable for the normal (61 commission of which (3% is earned by the vendor's broker (the listing broker) and 3% is earned by the purchaser's broker (the selling broker). The employee purchasing the house would normally use his employer to act on his behalf and therefore the employer would receive the 3% "selling broker's" commission. Normally where the employee is acting for a third party purchaser the employee would receive one-half of the L3X (i.e.1.5%) received by his employer as a commission. Where the employee himself is the purchaser, the employer only retains 20% of the (3% selling broker's commission received and pays 2.4% commission through to the employee.
It is your view that the discounted brokerage services provided by the employer to the employee-salesperson are equivalent to merchandise discounts, as described in paragraph 26 of IT-470R , in that the salesperson has acquired a real estate listing at a discount rather than merchandise. As a result it is your view that neither the waiver of the employee's share of the commission nor the waiver of part of the employer's share of that commission, would give rise to a taxable benefit to the employee in the "sale" situation described above. It is also your view that a similar conclusion can be reached with respect to commissions paid to the employee in the "purchase" situation described above.
It is our view that the employee-salesperson would be in receipt of taxable benefits in both the "sale" and "purchase" situations described and that paragraph 26 of IT-47 OR would have no application. The reasons for our views are as follows:
Real estate brokers provide a service whereby willing vendors and prospective purchasers are brought together. The real estate listing is merely a means to this end. Paragraph 26, of IT 470R deals with tangible property such as goods and chattels or similar commodities that can be bought and sold. The real estate listing, which is an integral part of the services provided by a real estate broker cannot, in our view, be considered "merchandise" by any existing legal or dictionary definitions.
If, in the first situation, the vendor had been dealing at arm's length with the listing broker, the vendor would have received 94%of selling price. However because of the existing employer-employee relationship the vendor-salesperson received 96.4% of the selling price. The additional amounts received by the vendor-salesperson are, in our view, benefits taxable in the hands of the salesperson under paragraph 6(1)(a) of the Income Tax Act (the Act).
If, in the second situation, the purchaser had been dealing at arm's length with the selling broker the purchaser would have paid 100% of the purchase price. However, because of the existing employer-employee relationship, the purchaser-salesperson effectively pays 97.6% of the purchase price as a result of the employer retaining only 20% of their share of the selling brokers commission and paying the balance to the employee. The additional amounts received by the employee-salesperson, as represented by the reduced purchase price paid are, in our view, benefits taxable in the hands of the salesperson under paragraph 6(l)(a) of the Act.
Yours truly,
ORIGINAL SIGNED BY ORIGINAL SIGNE PAR
ROBERT H. JOYCE
for Director Small Business &General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
NOV 17 198
WESTERN REGIONAL OFFICE HEAD OFFICE A. Toews Audit Programs Directorate Executive Officer Audit Applications Division
Revised Reassessment Policy Investment Tax Credit Overallowance Cases
This Directorate previously advised you that any reduction in ITC claimed by a taxpayer in a trade-in overallowance case was to be fully offset against the taxpayer's ITC pool, if possible. No reassessment would arise from these offsets. Offsetting could also be done, at the taxpayer's request, where excessive refundable ITC had been claimed under subsection 127.1(1).
This practice is not entirely in accordance with the provisions of the Income Tax Act and prevents the taxpayer from filing a Notice of Objection in respect of the reduction in ITC claims since no reassessment or redetermination of refundable credits is issued. The taxpayer can only appeal when the questioned amount of ITC is later claimed and disallowed. We propose that effective immediately, reassessments be issued, as required, in accordance with the policy set out below.
Where a reduction of ITC earned in a taxation year is required, the first step is to reduce the taxpayer's "investment tax credit", as defined in subsection 127(9), at the end of that taxation year (the taxpayer's ITC "pool"). That pool includes the credits earned in the current year plus prior year's credits carried over (and subsequent years' credits carried back), less any amounts deducted in computing tax payable in a prior taxation year. Whether or not a reassessment is to be issued will depend on what action the taxpayer took in respect of the balance in that pool. The following reassessment policy is to be followed.
1. If the taxpayer has claimed a refundable ITC for the year under subsection 127.1(1), a reassessment must De issued to recover the excess refund given to the taxpayer.
2. If the entire pool balance was applied against taxes payable in the year and/or a prior taxation year, a reassessment(s) will be issued to recover any excess ITC applied in the year(s). The prior year(s) will be reassessed first, and the particular year in which the ITC was earned is reassessed only if any excess continues to exist after reassessing the prior year(s).
3. If all or some portion of the excess ITC is carried forward to a subsequent year, a reassessment will not be required of that year if there is a balance in the taxpayer's ITC pool at the end of that subsequent year sufficient to cover the excess credit. The taxpayer will simply be advised that the balance in the ITC pool at the end of that year has been reduced by the amount of any excess, and that the taxpayer may appeal the reduction in the year that is is claimed. If there is not sufficient balance in the ITC pool at the end of the subsequent year to cover the excess carried forward, it will be necessary to reassess that subsequent year to recover any excess claimed in that year.
As all taxpayers will presumably have claimed any available refundable ITC and/or applied all available ITC against taxes payable in the year or in a prior year, a reassessment will be required in virtually all cases. Auditors, after determining the revised credit earned in the year, may find it beneficial to make the revised calculations as required on form T2038 in order to determine which taxation years require reassessment.
Notwithstanding the above policy, there may be situations where a taxpayer has already been offered an offset against the ITC pool instead of a reassessment. It is appropriate that these offers be proceeded with even in cases where they are technically not correct, provided the taxpayer is in agreement with the proposed adjustment and understands that by using this method there is no right of appeal in respect of that year.
K.R. Warren Director Audit Applications Division