16 April 1997 External T.I. 9703245 - DEDUCT SALARY IF NOT INSURED UNDER EI ACT?

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 Department.

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

Principal Issues:

whether salary paid to spouse is deductible if the salary amount is not insurable under the Employment Insurance Act

Position:

section 67 will operate to disallow any portion of the salary which is not reasonable in the circumstances

Reasons:

970324
XXXXXXXXXX Sandra Short

Attention: XXXXXXXXXX

April 16, 1997

Dear Sirs:

Re: Deductibility of salary amount which is not insurable under EI Act

This is in reply to your letter of December 10, 1996, which was forwarded to us by the Ottawa Tax Services Office. You have asked that we address the issue of the deductibility of a salary amount when the Department has ruled that the salary is not insurable under the Employment Insurance Act.

The salary is paid to the spouse of the sole shareholder of a Canadian- controlled private corporation, carrying on an active business in Canada. The spouse performs some clerical and administrative duties, for which an annual salary is paid. The Department has ruled that the salary is not insurable because of the non-arm's length relationship between the employer and the employee, in which the conditions of employment being enjoyed by the employee spouse are not similar to conditions enjoyed by arm's length individuals in similar circumstances.

Our Comments:

We agree with your view that, in order for any amount to be deductible to the employer, the salary expense must be incurred for the purpose of gaining or producing income from business or property. As well, and as noted by you, section 67 will operate to disallow any portion of the salary which is not "reasonable in the circumstances."

The fact that the Department has already ruled that the conditions of employment being enjoyed by the employee are dissimilar to the conditions which would be enjoyed by an arm's length employee suggests that some portion of the salary being paid to the employed spouse may be in excess of a reasonable amount. To what extent the salary is in excess of a reasonable amount can only be determined after a review of all of the facts of the case. We can provide you with the following general guidelines only.

A determination of the reasonableness of an amount of salary requires consideration of the duties performed by the individual, the skills required to carry out those duties, as well as the time spent in carrying them out. Comparison should be made to the remuneration of other employees of the same employer who have similar types of responsibilities, experience and skills. Where possible, comparisons should be made between the remuneration paid to the individual and the remuneration paid to employees who perform similar services for employers of similar size in similar businesses. It is the taxpayer's responsibility to establish the reasonableness of amounts paid.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch