25 February 2002 External T.I. 2001-0114905 - SHAREHOLDER-MANAGER REMUNERATION

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 salaries and bonuses paid to shareholder-managers are subject to section 67 of the Act.

Position: Yes. However, our administrative position with respect to shareholder-manager remuneration may apply.

Reasons: Section 67 applies to all expenses claimed by a taxpayer.

XXXXXXXXXX 2001-011490
A. Seidel, CMA
(613) 957-2058
February 25, 2002

Dear XXXXXXXXXX:

Re: Owner/Manager Remuneration

This is in reply to your letter dated December 4, 2001 in which you requested our views concerning the reasonableness of remuneration paid to owners and/or managers of a Canadian controlled private corporation ("CCPC"), within the meaning of subsection 125(7) of the Income Tax Act (the "Act").

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

As a general rule, all expenses are subject to section 67 of the Act.

Many CCPC's pay salaries and bonuses to shareholder-managers in amounts sufficient to reduce the taxable income of the corporation to or below the limits that qualify for the small business deduction. The issue that arises is whether this is "reasonable" in every situation since the services performed, time spent and remuneration paid will vary depending on the circumstances of each particular business. In order to provide some assurance that the salaries and bonuses paid to shareholder-managers would not be challenged during an audit, some general guidelines were developed by the CCRA. This issue was first addressed at the annual conference of the Canadian Tax Foundation in 1981. The CCRA provided further discussion on the reasonableness of shareholder-manager remuneration at the 2001 Canadian Tax Foundation CCRA Roundtable. (See Income Tax Technical News #22 for details)

The CCRA's general position is that shareholder-manager remuneration will not be challenged where a CCPC is paying remuneration to shareholder-managers who are actively involved in the day-to-day operations of the CCPC and are resident in Canada. Whether or not an individual is involved in the day-to-day operations of a company is a question of fact that can only be determined by reviewing all of the relevant facts, including any terms and conditions relevant to the employment. This would be verified through an audit of the relevant information relating to a particular individual's employment.

The CCRA has also stated that it will not challenge the reasonableness of remuneration paid directly to a shareholder-manager in those situations where the shares of the CCPC are not held directly by the shareholder-manager, e.g. the shares are held by a holding company, or where some of the shares of the CCPC are held, either directly or indirectly, by other family members.

Accordingly, in general terms, where shareholders, resident in Canada, are active in the day-to-day operations of a CCPC, the reasonableness of the remuneration paid to the operating managers will not be challenged, regardless of whether the shareholders own the shares of the CCPC directly or indirectly. However, if the remuneration is paid to a holding company or to a trust, and not directly to the shareholder-manager, it is our view that section 67 of the Act could apply to such remuneration.

A copy of Income Tax Technical News #22 is available at your local tax services office or may be obtained from our Internet web site (www.ccra-adrc.gc.ca).

We hope our comments are of assistance.

Yours truly,

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

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