What Corporate Structure is Best for Canadian Businesses with Commission Income?
Consider the successful real estate or insurance agent, the financial product vendor, the area sales representative, or any other person earning commission income. One day they are asked, if they ever considered running their activities through a corporation as opposed to providing the services personally. There are definitely some valuable possibilities, but there are dangers too.
In a July 11, 2017 Technical Interpretation, CRA opined that whether a corporation is actually carrying on a business and earning commission income is a question of fact and requires more than a mere assignment of income.
CRA noted that “if insurance agents, realtors, mutual fund salespersons, or other professionals are legally… precluded from assigning their commissions to a corporation, then the commission income must be reported by the individuals, and cannot be reported through a corporation, regardless of the documentation provided”. Care must be taken to document that it is truly the corporation providing the services and not just an individual. Commission contracts identifying the corporation as the service provider rather than simply the individual would be valuable.
While some professionals earning commission income are legally prohibited from incorporating (due to the provincial/ territorial laws), others may be practically precluded from doing so due to, for example, a refusal by customers or key suppliers to contract with a corporation.
If a corporation does earn commission income, one must ensure that the corporation would not be considered a personal services business (PSB). A PSB is essentially an individual acting as an employee for a third party, but for the presence of their own personal corporation as an intermediary. For example, consider John, an employee of a car manufacturer (CarCo). If John set up a new corporation, had CarCo pay his corporation, but kept on doing the same things under the same terms and conditions as his previous employment contract, he would likely be conducting a PSB. If classified as a PSB, the worker and their corporation could be subject to substantially higher taxes, plus the denial of several types of deductions.