8 May 2001 External T.I. 2001-0074115 - SALARIES-REASONABLENESS

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:

Does the administrative policy of the Agency regarding reasonableness of salaries and bonuses to shareholder-managers as stated in response to Q42 of the 1981 CTF apply in a situation where two corporate limited partners are in partnership with a public corporation and the limited partners wish to pay all their allocated income to the individual shareholder-manager because they cannot avail themselves of the small business deduction?

Position TAKEN
YES

Reasons FOR POSITION TAKEN:

Always reasonableness test. Consider recipient’s contribution to the business and use Q42 of 81 CTF as guide.

XXXXXXXXXX 2001-007411
C. Tremblay, CMA
May 8, 2001

Dear XXXXXXXXXX:

Re: Reasonableness of Salaries and Bonuses to Shareholders

This is in reply to your letter of March 5, 2001, and further to a telephone conversation (XXXXXXXXXX Tremblay) of April 5, 2001. You have asked what is the Canada Customs and Revenue Agency’s administrative position with respect to the reasonableness of salaries and bonuses to shareholder-managers of a corporation. You describe a particular situation where bonuses are paid to a shareholder-manager of a corporation that earns income from a limited partnership.

Our Comments

As explained in Information Circular 70-6R4, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance income tax ruling request. We can, however, provide you with the following general comments.

It is always a question of fact whether the amount of an owner-manager’s salary and/or bonus is reasonable in the circumstances and thus deductible in computing income from a business pursuant to section 67 of the Income Tax Act (the “Act”). Although our 1981 CTF comments continue to provide some guidance in this regard, it reflects a general position only which may vary according to the particular facts of a specific situation. In our view, one of the primary factors to be considered when determining the reasonableness of the amount of salary and/or bonus is the recipient’s contribution to the business. Where a corporation pays a salary and/or bonus out of profits to a shareholder-manager who is actively engaged in the underlying business, it is unlikely that the reasonableness of the deduction will be questioned unless it results in an undue tax advantage.

We trust our comments will be of assistance to you.

Yours truly,

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 2 -