Fire Alarm Systems; Income Tax – Agent’s Waiver of Its Commission Share #81

By Gerry Neely
B.A. LL.B.

The high energy costs of the 70's led to an increase in the number of free-standing wood stoves providing heat to economy minded home owners. This in turn led to a problem when the owner of the home containing the wood stove took it with him when the house was sold.

The stove was probably a fixture, both because of the degree to which it was attached to the building, but also because of the purpose for which it was attached, namely to improve the usefulness or enjoyment of the home by the owner. If it were the sole source of heat, it is quite clear that it was a fixture that should have been left, but because no reference was made to it in the Offer to Purchase, the vendor concluded that it was his to take. This problem was referred to in Column #41 in which licensees were advised to refer to the wood stove in the Offer to Purchase if it were intended to be included in the purchase price.

The perceived high crime rate of the 80's has resulted in the increasing installation of burglar and fire alarm systems in private homes. If the system consists of a control box connected by wires in the walls to motion or infra red detector boxes mounted on the walls of the rooms where illegal entry is most likely to occur, it is a fixture which should be left.

However, as with wood stoves, so now with alarm systems. In listing a property containing an alarm system, the licensee should determine whether or not the purchase price is to include the alarm system and that fact should be recorded in the listing contract and in the Offer to Purchase.

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A licensee has asked if an agent waives its portion of the commission on property sold or purchased by a licensee employed by the agent, is the amount of commission waived by the agent taxable income in the hands of the licensee?

From a sampling of opinions from various sources, the answer is yes, no, maybe or that depends.

There appears to be little problem where the licensee is selling his own property and his agent has agreed to waive its portion of the commission. If there is a problem, it will be because the licensee received a benefit arising from his employment and the tax department decides to plow new ground in the commission field.

A problem can arise, however, when the licensee purchases property through his agent and the agent rebates to the licensee the agent's portion of a commission received from the vendor. This happened to a salesman who, in 1964, bought a home through the real estate firm which employed him. The firm received the total commission and paid its share to the salesman, giving him a T-4 slip for commission earned by the salesman. When this amount was taxed as income, the salesman appealed on the basis that he was an independent businessman rather than an employee, and that the commission cheque was a refund of part of the purchase price of a capital asset.

These arguments were unsuccessful. He was held to be an employee who received this money only by virtue of his employment.

The difficulty for the salesman in this case arose because his agent had to account in some fashion for the income received by the agency but not retained by it. It did that by the off-setting expensed commission paid to the salesman. This created a paper trail which led to the Tax Appeal Board.

Taxpayers are entitled to structure their financial affairs to minimize the amount of tax paid by them. Perhaps there would be no problem for the purchasing licensee if by agreement with his agent and the vendor, the commission and the purchase price were reduced by the agent's share of the commission.

Considering the wide powers of the Department of National Revenue, no licensee should regard these comments as anything more than food for thought. Any action resulting from such thought should be made only on the basis of good tax advice based upon a full explanation of the facts.

1.

Grant v. Minister of National Revenue, 67 D.T.C. 249.

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