At issue
Being able to earn income through a corporation has historically allowed for more flexibility as to how and when tax will apply to the income.
I say “historically” because we are in the midst of proposals from the current federal government that would significantly affect private corporation taxation. The focus there is not on whether the corporation can be used to earn the income, but on what happens to the assets of a corporation after it has legitimately earned it.
For advisors in the business of trading in securities, the first issue to resolve is whether commission income can be earned through a corporation at all. The CRA commented on this in a letter released in the summer of 2017, tying together its past commentaries in an effort to clarify its position on the issue.
IT-189R2 Corporations used by practicing members of professions
Last updated in 1991, this Interpretation Bulletin outlines the conditions under which professional practices may be incorporated. As a first condition, it will be allowed “unless provincial law or the regulatory body for the particular profession provides that only individuals may practice the profession.” Paraphrasing the second condition, it must be factually true that the corporation carries on the business.
The IT refers to professions “such as law, medicine, engineering, architecture or accounting.” Though it’s a short list, it does not rule out other professions qualifying.
Income Tax Technical News 22 (January 11, 2002)
This ITTN dealt with the more nuanced issue of whether commissioned income earned by an individual could be transferred to a corporation. CRA’s comments were prompted by the case of Wallsten v. R. 2001 DTC 215 that ruled in favour of the taxpayer, despite that Mr. Wallsten’s contract with Sun Life prohibited him from assigning his commissions to any third party, in this case his corporation. The case proceeded under the informal court procedure, and therefore had no binding precedent value.
In the ITTN CRA maintained its position that it was not bound by Wallsten. However, it accepted that if a given professional is “not otherwise precluded” from assigning income to a corporation, and if “the corporation is carrying on the business, then the commission income would be reported by the corporation.”
CRA 2017-0693761E5 (July 11, 2017)
The principal issue in this CRA letter is “whether an individual in the business of trading in securities can earn commission income through a corporation.” I’ve added the underline here to emphasize what is being asked, so you can compare against how it is answered.
The author reproduces the key extracts from IT-89R2 and ITTN-22, then ties them together in the concluding sentence:
“Whether a corporation is factually carrying on that business is a question of fact that must be determined on a case-by-case basis and in our view, requires more than a mere assignment of income.” [emphasis added]
Thus, the CRA will not give a blanket approval, harkening back to the factual foundation. At the same time, it does not say that assignment of income to the corporation is not possible, but rather that it is not sufficient on its own to enable the corporation to report it.
Practice points
- Securities commissions cannot be earned by a corporation if that is forbidden by a provincial regulation, a governing professional body or a private business contract.
- The corporation must be factually carrying on the business.
- Assignment of commissions from an individual to a corporation may be acceptable, but that action alone will not suffice to allow the corporation to report the income.
- Keep an eye on the current federal proposals regarding private corporation taxation, as this could affect longer term usefulness of a corporation, and thereby influence the decision to use a corporation in the first place.
