5 December 2001 External T.I. 2011-0396821E5 - Commission or bonus paid?

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: Is a monthly payment to a sales manager a commission where the monthly amount is based on gross monthly sales profits of the department?

Position: No.

Reasons: The employees are sales managers and do not make the sales themselves. They receive a salary and an additional payment monthly based on a percentage of gross profits from the previous month's financial statement.

XXXXXXXXXX 						2011-039682
							B. Ruttan-Morillo
December 5, 2011

Dear XXXXXXXXXX :

Re: Commission or bonus income

We are writing in response to your letter of February 9, 2011, concerning whether or not certain amounts paid to sales managers would be considered a commission or a bonus.

In the situation you described, the sales managers are paid a bi-weekly salary and are also paid a percentage of the monthly gross profits of the sales department as reported in the monthly financial statements. The sales managers are not salespersons themselves, but manage the salespersons in the department. You have asked whether the monthly payment to the sales managers would be considered a commission or bonus since the sales managers wish to deduct expenses under paragraph 8(1)(f) of the Income Tax Act ("the Act").

Firstly, the amount in question is income to the sales managers under section 5 of the Act regardless of whether it is a commission or bonus. However, the distinction between commission and bonus is important because only the sales expenses of a commissioned employee may be deducted under paragraph 8(1)(f) of the Act.

Consistent with case law, it is our view that an amount received by an employee will be considered a "commission or other similar amount fixed by reference to the volume of the sales made or the contracts negotiated", for the purposes of paragraph 8(1)(f) of the Act, where the amount is computed with reference to the volume or dollar amount of sales that the employee makes on behalf of the employer. On the other hand, a bonus is an amount in addition to the employee's normal remuneration that may be paid in recognition of achieving certain performance objectives, including the achievement of specific sales targets. Therefore, the monthly amount paid to the sales managers is likely not a commission, since the sales were actually made by other employees.

It is important to note that even if the monthly amount was determined to be a commission, the sales managers would only be allowed a deduction under paragraph 8(1)(f) of the Act if they also met the other criteria of that paragraph. Generally, in order to deduct sales expenses, commissioned employees must be required by their employer to pay their own expenses and must be ordinarily required to carry on their employment duties away from the employer's place of business.

We trust these comments will be of assistance.

Nerill Thomas-Wilkinson
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch