CRA relies on s. 248(28) to avoid double taxation under s. 15(1) and s. 5

A corporation pays wages to an individual employee who is not a shareholder but does not deal at arm’s length with a shareholder and a portion of the wages is subsequently determined to be unreasonable pursuant to s. 67. CRA indicated that the overpayment would not be included in the individual’s income under s. 15(1) because the benefit had not been conferred on the individual in a capacity of shareholder. There also would be no deemed inclusion under s. 15(1.4)(c) because the same amount had been included in the individual’s employment income.

Where such non-arm’s length employee was also a shareholder, although the overpayment would otherwise be income under s. 15(1), s. 248(28) would exclude the application of s. 15(1), so that there was no double taxation. (This seems like a departure from the traditional approach of determining whether a benefit was received qua employee or qua shareholder, and then only applying the more applicable provision.) Again, s. 15(1.4)(c) would not apply because of the s. 5 inclusion.

Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.2 under s. 15(1).