56 Describe indirect payments and how they are treated for tax purposes.

Sean Co


A typical indirect payment would occur when person ‘A’  (the person who does the work) instructs the payor to pay person ‘B’ for work performed by person ‘A’.  For example, I might instruct my employer to pay my spouse (instead of me) because my spouse is in a lower tax bracket.  The indirect payment rules (ITA 56 (2)) bring this income back into the hands of the individual who actually provided the service rather than the one who received the payment.

In chapter 2 we learned about tax avoidance, tax evasion, tax deferral and tax planning as well as the purpose of General Anti-Avoidance Rule (GAAR). Indirect payments would lean towards tax avoidance, considering that these payments exist to reduce a family’s overall tax burden.

As per all taxable income, if an indirect payment satisfies all the conditions, that payment would be taxed accordingly as an addition to the taxpayer’s taxable income.

Four conditions required to satisfy subsection 56(2) rule:

A. If the payment or transfer of assets is made to a person other than the taxpayer

B. The payment was made in pursuant to the direction or concurrence with the taxpayer (does not need to be obvious, can be passive or implicit)

C. There is a benefit involved in the payment, whether to the taxpayer or another person that the taxpayer wishes to give the payment to

D. The payment would have been included in the taxable amount of the taxpayer if the payment was directly made to the taxpayer


An example of this would be if Corporation Neasco decides to give gifts to their shareholders’ family members, such as apparel or appliances. Let’s say these gifts are worth $20,000 in total. The first condition is already satisfied, as Neasco transfers the said $20,000 assets to the family members other than the shareholders themselves. Since that the gifts were given to the shareholders’ family members, both the shareholders and Corporation Neasco concurred to make this happen. This satisfies Rule B. Moreover, the gifts worth $20,000 were to the shareholders’ family members so that they can use them, which would be considered as a benefit, satisfying rule C.

Lastly, if this $20,000 was given directly to the shareholders, it would be included as a part of their income because of subsection 15(1), which says that if a benefit received by a shareholder from a corporation, that benefit would be included in their taxable income. In this case, the $20,000 worth of gifts that the family members of the shareholders received would still be included in the shareholders’ taxable income as all the conditions of subsection 56(2) are satisfied.


Any amount in a retirement plan assigned by a taxpayer under subsection 65.1 (“portion of a contributor’s retirement pension to the contributor’s spouse or common-law partner”) of the Canada pension plan or a similar provincial pension plan as stated in section 3 of the Canada pension plan/prescribed provincial pension plan is exempt from the rules mentioned in Subsection 56(2).

Some forms of split income (like split pension income) are also exempt from the indirect payment rules.

Interactive content (Author: Jagbir Ganda, January 2020)

Interactive content (Author: Samuel Garzitto, January 2020)

References and Resources: 

January 2020


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