CANADIAN T4A REPORING REQUIREMENTS
COMPLICATED FOR DIRECT SELLERS & DEPENDENT ON DISTRIBUTION MODELS
Canadian direct selling companies (the “Company”) typically operate using one of two different distribution models.
In the “classic model”, independent sales contractors (“ISCs”) would be expected to purchase goods from the Company and resell them to consumers or other ISCs, with the ISCs earning a mark-up on the difference between their purchase and selling prices. In the more modern variation of direct selling distribution, the Company would be expected to sell directly to consumers but compensate their ISCs for acting as either sales agents or sales representatives, based on their parts in putting the sales transaction together.
How Canada’s T4A requirement applies to these transactions is generally dependent upon the structure of the distribution platform.
Canadian T4A Requirements
Under the Canadian Income Tax Act (the “ITA”), every person who pays an independent contractor (i.e., non-employees) for services is required to issue a Form T4A annually to that contractor and provide a summary report to CRA of all T4As issued annually. (This is similar to the US 1099).
The T4A effectively tracks the income of the independent contractor for the provision of services, subsection 200(1) of the Income Tax Regulations (“ITR”) requires that persons making payments governed by subsection 153(1) of the Income Tax Act (“ITA”) must file a T4A slip.
This reporting obligations is mandatory for each person who has received payments of more than $500 in the relevant calendar year. The filing deadline is February 28.
ISCs & T4As – Differing Distribution Models
In the “classic model” of direct selling, where the ITCs are purchasing goods from the Company and reselling them to consumers or other ISCs, the mark-up earned by the ISCs may not technically come within the "for services" requirement in these rules, although other "downline" or "bonus payments" might well be caught. On the other hand, in the "sale agent" or "sale rep" model, it is a virtual certainty that all payments would be "for services".
Additional Complications for Non-Canadian ISCS: Reg 105
Note that Regulation 105 of the ITR also requires any Company paying a non-resident person a fee, commission or other amount in respect of services rendered in Canada to deduct or withhold 15 per cent of such payment, and remit that to the CRA, on a monthly basis.
Companies in this position are also required to file Form T4A-NR prior to the February 28th deadline each year, and to remit deductions monthly.
Direct Sellers need to properly understand their T4A obligations, and this will usually depend on their particular distribution model.
Experienced tax professionals can help.
Takeaways
Issuing T4A slips is an essential part of operating some direct selling operations in Canada. But all Direct Selling Companies operating in Canada need to grapple with the question of whether to issue T4A slips. The answer will often depend on the distribution structure being used and experienced tax professionals can help.
For help with T4As as a Direct Seller, click here.
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