Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Are the amounts investors receive subject to income tax and should the amounts be reported on a T-5?
Position: Amounts are income subject to tax and should be reported on a T-5 under box 17
Reasons: Payments are based on sales; seem to be royalty payments.
XXXXXXXXXX 2011-042289
C. Tremblay, CMA
(819) 281-6906
November 28, 2011
Dear XXXXXXXXXX
Re: Technical Interpretation - Investor Payments
This is in response to your letter of September 13, 2011, and further to the information provided on October 3, and October 12, 2011, wherein you asked us how certain payments to investors should be treated for tax purposes and if, and when, a T-5 needs to be issued.
You describe a situation where a corporation raised money from investors. You further state that the investments are neither shares nor loans, and that the investors have no ownership rights. Under a typical investor agreement, the corporation is obliged to pay the investors based on sales volume but the investors have no other rights or guarantees for the amount they have invested. Depending on the amount invested, investors can receive up to a maximum of 10 to 20 times the value of their investment. There is no time limit on the payments the investors can receive, but once the stipulated maximum payments are reached, the payments will cease. You note that, to date, the payments have been minimal and that the corporation has taken no income deduction for any payments made to investors as those payments have been considered a return of capital; further, those payments have been reduced from investor balances which are shown as long-term debt on the balance sheet.
However, you also submitted an Investor Agreement and it should be noted that this agreement includes the following statement: "Payments to the investor constitute a royalty and are taxed as an income stream....It is the responsibility of the investor to report payments on his/her tax return."
Our Comments:
Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled Advance Income Tax Rulings. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. If, however, the particular transactions are completed or partially completed, the enquiry should be addressed to the relevant Tax Services Office. However, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries which are not advance income tax rulings and we are prepared to provide you with the following comments.
Generally, to determine the nature of a payment to an investor, the intent of the parties as well as the specific agreements relating to the investment will need to be considered. The dollar amount of a payment to an investor should not be determinative as to the nature of the payment. Typically, without conclusive evidence to the contrary, initial amounts received from an investment by an investor are income and then later, when the investment capital is being returned, payments received would be applied to reduce the initial investment; if the investment capital is not returned, a capital loss may be allowed.
Generally, if an investment is not a loan, amounts paid to investors would not meet the definition of interest as the amounts paid would not be calculated on a day-to-day accrual, would not be calculated on a principal sum and would not be based on compensation for the use of a principal sum.
Where amounts are paid to investors based on sales that the corporation makes, in our view, the payments to the investors would appear to be similar to a royalty, or to a payment based on production or use, which is considered income under paragraph 12(1)(g) of the Income Tax Act. Generally, income from royalties is property income and should be reported in Box 17 of a T5 slip, unless the total amount paid to the investor for the year is less than $50.
We trust that the foregoing will be of assistance to you.
Yours truly,
R. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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