26 June 2012 External T.I. 2011-0409551E5 - Income Transferred to a Charity

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: 1.Whether an employee that has transferred to their employer, a portion of their income earned abroad, is entitled to deduct all of the amounts paid from their taxable income for the year? 2. Whether a registered charity should issue an official donation receipt to an employee that transfers amounts to a charity in order to adhere to their employer’s guidelines?

Position: 1 & 2 Question of fact.

Reasons: 1. The terms of employment may in effect provide that all services performed by the employee shall be performed as an employee of the corporation and that all income from such services shall be accounted for by the corporation. 2. A registered charity may issue an official donation receipt where the amounts are considered a gift.

XXXXXXXXXX

										2011-040955
										C. Underhill

June 26, 2012

Dear XXXXXXXXXX:

Re: Income Transferred to a Charity

This is in response to your letter of June 7, 2011, concerning the taxation of certain amounts transferred by an employee to his or her employer. More specifically, you have enquired whether an employee who has transferred to his or her employer certain amounts received from performing services overseas, is entitled to deduct the transferred amounts in computing his or her taxable income for the year. You have also enquired whether the employer (Registered Co), which is a registered charity, should issue an official donation receipt to the employee who transferred these amounts to Registered Co.

In the situation you described, an individual who is resident in Canada is employed by Registered Co to provide teaching services overseas. While working overseas for Registered Co, the employee becomes engaged in a contract to provide teaching services for another company (second contract) and is required to transfer all amounts received under the second contract to Registered Co. This requirement is stated in the Guiding Rules of Registered Co.

Our Comments

Canada taxes individuals on the basis of residence. Individuals who are residents of Canada during a tax year are subject to Canadian income tax on their worldwide income from all sources. If it is determined that the amounts received under the second contract should be income of the employee, then the employee would be taxed in Canada on those amounts. However, if the terms of employment provide that the individual is in effect providing services under the second contract as an employee of Registered Co, it may be determined that the amounts in question are not income of the employee.

The courts have held that the terms of employment must be examined in order to determine whether the amounts received under a particular contract of services should be accounted for by the employee or another party. The employment terms may in effect provide that all services performed by the employee shall be performed as an employee of Registered Co and that all amounts received under the second contract shall be accounted for by Registered Co. Any money receivable from a third party in respect of work performed by an employee acting in the course of his or her employment generally belongs to the employer.

Whether the amounts received under the second contract should be reported as income by the employee or Registered Co is a question of fact to be determined on a case by case basis, and would require a review of all the facts and circumstances. This review would be carried out by audit officials in the local tax services office and would include a review of the all relevant documents.

A gift, for the purposes of section 118.1 of the Income Tax Act, is a voluntary transfer of property without valuable consideration. As noted in Interpretation Bulletin IT-110R3, Gifts and Official Donation Receipts, generally a gift is made if all three of the conditions listed below are satisfied:

1. Property - usually cash - is transferred by a donor to a registered charity,
2. The transfer is voluntary, and
3. The transfer is made without expectation of return. No benefit of any kind may be provided to the donor or to anyone designated by the donor, except where the benefit is of nominal value.

Registered Co should only issue an official donation receipt where all of the above conditions are satisfied. Where it is determined that the amounts received under the second contract belong to the employer and are not included in the income of the employee, the transfer of those amounts to the employer would clearly not be a voluntary transfer of the employee’s property and would therefore not be a gift.

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