3 July 2002 External T.I. 2002-0141305 - SH-MANAGER BONUS AT END OF BUS.

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a shareholder-manager's bonus is deductible in the situation where a year-end is triggered by the sale of the shareholder's 100% shareholding in the particular corporation. Also, the bonus payable, along with an equal amount of cash, would be transferred to a related corporation at year-end, before the particular corporation's shares are sold.

Position: Question of fact.

Reasons: Our general policy regarding the deductibility of management salaries and bonuses, as outlined in ITN22, was established with straightforward situations in mind.

XXXXXXXXXX 	J. Gibbons, CGA
		2002-014130
July 3, 2002

Dear XXXXXXXXXX:

We are replying to your facsimile dated May 14, 2002, concerning the deductibility of a shareholder-manager's bonus in the situation where a year-end is triggered by the sale of the shareholder's 100% shareholding in the particular corporation. Also, you indicated that the bonus payable, along with an equal amount of cash, would be transferred to a related corporation at year-end, before the particular corporation's shares are sold.

Since your situation relates to actual proposed transactions, we refer you to our policy in this regard, which is set out in Information Circular 70-6R5. This circular explains, among other things, that it is our policy not to provide written confirmation of the tax implications inherent in particular transactions unless an advance ruling request is submitted in the manner set out in that circular. However, we have provided the following general comments.

As a general rule, the deduction of all expenses is subject to the test of reasonableness in section 67 of the Income Tax Act, and the question of whether this provision applies in an actual situation can only be determined after a consideration of all of the facts. However, it is our policy not to challenge the reasonableness of salaries and bonuses when they are paid to managers who are shareholders of Canadian-controlled private corporations (either directly or through a holding company), are Canadian residents, and are actively involved in the day-to-day operations of the company. It is emphasized that the Canadian resident recipients must be active in the operating business and contribute to the income-producing activities from which the remuneration is paid. This policy is outlined in Income Tax Technical News Issue No. 22 ("ITN22"), dated January 11, 2002.

Our general policy regarding the deductibility of management salaries and bonuses, as outlined in ITN22, was established with straightforward situations in mind. In more complex situations, such as the one outlined in your letter, the applicability of section 67 can only be determined on a case-by-case basis.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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