7 November 2003 Ministerial Correspondence 2003-0046624 - REASONABLENESS SHAREHOLDER 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 remuneration paid out of the proceeds generated from a major sale of business assets is beyond the scope of the policy on when, for purposes of section 67 of the Income Tax Act, shareholder/manager remuneration will be considered reasonable.

Position: Generally, yes. We will, however, consider situations on an advance income tax ruling basis.

Reasons: The income generated from a major sale of business assets is not earned during the normal course of business operations, but rather is an indication of the cessation of business operations.

Randy Hewlett, B.Comm.

XXXXXXXXXX 613-957-8973
2003-004662
November 7, 2003

Dear XXXXXXXXXX:

Re: Reasonableness of Shareholder/Manager Remuneration

The Honourable Elinor Caplan, Minister of National Revenue, has asked me to reply to your letter of October 24, 2003, concerning the CCRA's policy on when, for purposes of section 67 of the Income Tax Act (the Act), shareholder/manager remuneration will be considered reasonable.

In your letter, it was noted that this policy was recently discussed at the 2003 Canadian Tax Foundation conference, a summary of which will be published in an upcoming Income Tax Technical News. You are concerned with our response to Question 4 on the above noted topic, in which it was stated that:

We would consider a situation in which a CCPC pays the remuneration out of the proceeds generated from a major sale of business assets, including the sale of the entire business assets or those of a large division, to be beyond the scope of the policy. This would encompass all sources of income triggered by the proceeds, including capital gains, recapture of capital cost allowance, and income arising from the disposition of eligible capital properties.

In your view, recapture of capital cost allowance and income arising from the disposition of an eligible capital property are active business income and therefore, should be treated the same as other active business income for purposes of this policy.

Our Comments

The purpose of the 2003 CTF discussion on the reasonableness of shareholder/manager remuneration was to further clarify the CCRA's policy on this issue. As noted in our response to Question 1, the general purpose of the policy is to provide the flexibility to a CCPC and its active shareholder/managers to take advantage of marginal tax rates by reducing the corporation's taxable income to or below the small business deduction limit through the payment of salaries and bonuses from income that is derived from normal business operations, and to provide certainty as to the taxable status of the transactions. Provided the other conditions outlined in the policy are met, remuneration paid from income earned from the normal, ongoing business operations will be considered reasonable for purposes of section 67 of the Act. Given the broad scope of section 67 of the Act, we are of the view that the policy provides a high level of certainty in most situations with respect to the reasonableness of remuneration paid to shareholder/managers active in the daily operations of a CCPC.

We also feel, however, that it is appropriate to place reasonable parameters around the scope of any administrative policy so that the law is not rendered meaningless. In this context, we are not prepared to extend this policy in all circumstances where the remuneration is paid from a source of income that is not earned from the normal, ongoing business operations. The basis for our response to Question 4 is that income generated from a major sale of business assets is not earned during the normal course of business operations, but rather is an indication of the cessation of business operations. The reasonableness of the remuneration paid in this situation for purposes of section 67 of the Act will be a question of fact. It should also be noted that in our response to Question 4, it was indicated that we would not generally be concerned with a situation in which there is an incidental sale of business assets that occurs during the normal course of business operations.

We would like to emphasize that our response to Question 4 does not mean that remuneration paid from the proceeds of a major sale of business assets will necessarily be considered unreasonable for purposes of section 67 of the Act. As noted in our response to Question 6, we merely reserve the right to review the reasonableness of the amount. Further, we also stated that we are prepared to consider any factual situation in the context of an advance income tax ruling. As noted in our response to Question 7, when an advance income tax ruling is requested in these types of situations, we will consider all of the income tax consequences of the proposed transactions, including the application of section 67 of the Act. In our view, the advance income tax ruling process will provide certainty to taxpayers as to the taxable status of remuneration paid in situations that may be outside the scope of the policy.

We trust our comments are of assistance

Yours sincerely,

Marc Vanasse, CA
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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