25 April 2002 External T.I. 2002-0128985 - MANAGEMENT BONUS PAID TO ESTATE

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 section 67 of the Act will apply when a bonus is paid to a shareholder's estate where the shareholder was actively involved in the operations and management of the corporation during the year before he passed away.

Position: Question of fact.

Reasons: The situation is not covered by the CCRA policy outlined in Income Tax Technical News Issue No. 22, dated January 11, 2002.

XXXXXXXXXX 2002-012898
J. Gibbons, CGA
April 25, 2002

Dear XXXXXXXXXX:

We are replying to your letter dated March 13, 2002, in which you requested our comments on the application of section 67 of the Income Tax Act (the "Act") to a shareholder/manager's bonus. Our comments are of a general nature only since we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. In your letter, you described the following hypothetical situation:

? The corporation is a Canadian-controlled private corporation.

? The shareholders are actively involved in the operations and management of the business.

? The corporation's practice has been to pay bonuses to the active shareholders to reduce the corporation's active business income to $200,000.

? One of the active shareholders passed away during the year and the spouse inherited the particular shares.

You wish to know whether section 67 of the Act would deny the deduction of the entire bonus payment or only the portion relating to the period after the shareholder's death.

Our Comments

As a general rule, the deduction of all expenses is subject to the test of reasonableness in section 67 of the Act, and the question of whether this provision applies in an actual situation can only be determined after a consideration of all of the facts. However, it is our policy not to challenge the reasonableness of salaries and bonuses when they are paid to managers who are shareholders of Canadian-controlled private corporations (either directly or through a holding company), are Canadian residents, and are actively involved in the day-to-day operations of the company. It is emphasized that the Canadian resident recipients must be active in the operating business and contribute to the income-producing activities from which the remuneration is paid. This policy is outlined in Income Tax Technical News Issue No. 22, dated January 11, 2002.

Since the situation outlined in your letter is not covered by the CCRA policy discussed above, we can not confirm in advance whether or not the quantum of a bonus will be accepted as reasonable in the circumstances.

We trust that these comments will be of assistance.

Yours truly,

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

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