8 April 2002 External T.I. 2002-0128875 - 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: Numerous questions related to the CCRA policy on shareholder-manager remuneration, now published in Income Tax Technical News No 22. The main trust of the inquiry concerned the terms "active business income" and "non-active business income" as used in the document.

Position: These terms are not defined in the Act. The response given was general in nature and is meant to encompass all business income, active or otherwise. In general terms, it could include income incidental to an active business and income of a "specified investment business" as defined in subsection 125(7) of the Income Tax Act.

Reasons: See below.

XXXXXXXXXX 2002-012887

R. Hewlett, B.Comm.

April 8, 2002

Dear XXXXXXXXXX:

Re: Shareholder-Manager Remuneration From Non-Active Business Income

We are writing in response to your letter dated March 14, 2002, wherein you asked several questions concerning the position of the Canada Customs and Revenue Agency (CCRA) with respect to the above-noted subject.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments on each of the questions you pose.

1. Does the answer to Question 7 in Income Tax Technical News No. 22 (ITN # 22) on the subject of shareholder-manager remuneration represent a change in policy for the CCRA?

This position is a clarification of previous pronouncements made by the CCRA in response to Question 42 at the 1981 Round Table, Question 56 at the 1990 Round Table and Question 26 at the 1991 Round Table.

2. Does the term "non-active business income" include a corporation earning specified investment business income?

The response given was general in nature and is meant to encompass all business income, active or otherwise. In general terms, this could include income incidental to an active business and income of a "specified investment business" as defined in subsection 125(7) of the Income Tax Act.

3. If a corporation's only source of income is from stocks and interest bearing investments, does it earn non-active business income?

If this corporation were a specified investment business, this income would be considered "non-active business income" as that phrase is used in ITN # 22. Whether or not the corporation is carrying on a specified investment business is a question of fact that depends upon, among other things, the number of employees.

4. If a corporation has one Canadian resident shareholder who simply manages the portfolio, is this sufficient to make him or her an active shareholder-manager, such that the reasonableness of any salary or bonus paid would not be challenged?

One of the requirements of the policy is that the shareholder-manager must be active in the day-to-day operations of the business. Whether or not managing a portfolio is sufficient to qualify as being active in the day-to-day operations of the business, will be a question of fact.

5. How much activity is required for a shareholder-manager to be considered active? Would it make any difference if a third party managed the portfolio, such that the shareholder-manager had very little input into the investment activity?

As noted above, the amount of activity required for a shareholder-manager to be considered active into the day-to-day operations of a business will be a question of fact. However, we are of the view that where a corporation's only business activity is investments, which are managed through a third party, the shareholder is not considered active in the day-to-day operations of the business.

We trust our comments will be of assistance to you.

Yours truly,

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

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