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.
Principal Issues: Whether the proceeds from the proposed sale of eligible capital property and depreciable property can be paid to the shareholder/manager as a deductible bonus.
Position: Yes.
Reasons: It is within the scope of CRA policy with respect to shareholder/manager remuneration. The company has a history of declaring bonuses to its sole shareholder/manager to remunerate him for the profits the company has earned that are attributable to his special know-how and professional skill. The company is a CCPC paying a bonus to the active shareholder/manager who is resident in Canada, in order to reduce the CCPC's taxable income to an amount that approximates or is less than an amount which is eligible for the small business deduction. The bonus is deductible since it is incurred for the purpose of earning business income and is reasonable.
XXXXXXXXXX 2005-015734
XXXXXXXXXX, 2006
Dear XXXXXXXXXX,
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling in respect of the above-noted company and individual as it pertains to the deductibility of shareholder/manager remuneration. We also acknowledge additional information obtained in a subsequent telephone conversation.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:
(i) is in an earlier return of a taxpayer or a related person;
(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of a taxpayer or a related person;
(iii) is under objection by a taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) is the subject of a ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Definitions
1. The "Corporation" is the XXXXXXXXXX.
2. The "Shareholder/Manager" is XXXXXXXXXX.
3. The "Profession" is the practice of XXXXXXXXXX carried on in the province of XXXXXXXXXX by the Shareholder/Manager on behalf of the Corporation.
4. The "Assets" are the assets of the Corporation used to carry on the Profession.
5. "Mr. A" is XXXXXXXXXX.
6. "PurchaseCo" is XXXXXXXXXX.
7. The "Purchase Price" is $XXXXXXXXXX.
Our understanding of the relevant facts, proposed transactions and the purposes of the proposed transactions is as follows:
Facts
8. The Corporation is a "Canadian controlled private corporation" as defined in subsection 125(7) of the Act.
9. The Corporation's business number is XXXXXXXXXX.
10. The Corporation has a fiscal year end of XXXXXXXXXX.
11. The Corporation was incorporated under the Business Corporations Act (XXXXXXXXXX) on XXXXXXXXXX, and carries on the Profession.
12. The Shareholder/Manager is the sole shareholder of the Corporation.
13. The Shareholder/Manager's social insurance number is XXXXXXXXXX.
14. The Shareholder/Manager is resident in Canada for purposes of the Act, is qualified to practice the Profession and does so as an employee of the Corporation.
15. The Corporation's profits from the profession since inception have stemmed from the Shareholder/Manager's professional knowledge and skills in the Profession.
16. The Corporation has historically declared a bonus each fiscal year, to the Shareholder/Manager, so that taxable income from the profession approximates or is less than an amount which is eligible for the small business deduction pursuant to subsection 125(1) of the Act.
17. Mr. A is the sole shareholder of PurchaseCo.
18. Mr. A is qualified to practice XXXXXXXXXX in XXXXXXXXXX and does so as an employee of PurchaseCo. PurchaseCo makes the services of Mr. A available to the Corporation and receives fees from the Corporation for such services.
19. The Corporation has agreed to sell XXXXXXXXXX of the Assets to PurchaseCo in consideration for the Purchase Price.
20. The Corporation, the Shareholder/Manager, Mr. A and PurchaseCo each file income tax returns at the XXXXXXXXXX Taxation Centre and their Tax Services Office is located in XXXXXXXXXX.
Proposed Transactions
21. PurchaseCo will acquire XXXXXXXXXX of the Assets from the Corporation for the Purchase Price before XXXXXXXXXX.
22. The Corporation will allocate the proceeds of disposition principally to eligible capital property and the balance to depreciable property.
23. Before XXXXXXXXXX, the Corporation will declare a bonus payable to the Shareholder/Manager which, along with the Shareholder/Manager's salary for the fiscal year, will reduce the Corporation's income to an amount that is equal to or less than the amount which is eligible for the small business deduction.
24. The Corporation will pay the bonus and salary to the Shareholder/Manager on or before XXXXXXXXXX.
25. Following the acquisition of the Assets by PurchaseCo, PurchaseCo and the Corporation will enter into a cost-sharing agreement in which each will agree to pay its proportionate share of any joint costs of the XXXXXXXXXX practice conducted by the Corporation and PurchaseCo. PurchaseCo and the Corporation, however, will not carry on their respective businesses in partnership.
Purposes of the Proposed Transactions
26. The purposes of the proposed transactions are as follows:
(i) to dispose of a portion of the Corporation's XXXXXXXXXX practice to PurchaseCo;
(ii) to allow the proceeds of disposition to be paid to the Shareholder/Manager in a tax effective manner by reducing the Corporation's income to an amount that approximates or is less than an amount which is eligible for the small business deduction; and
(iii) to remunerate the Shareholder/Manager for the Shareholder/Manager's key contribution to the success of the Corporation.
Rulings Given
Provided that:
a. The preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions;
b. The proposed transactions are completed in the manner described above;
c. There are no other transactions, which may be relevant to the ruling requested;
d. The Corporation withholds source deductions from the amount of the bonus and salary paid to the Shareholder/Manager in accordance with the prescribed rules and remits the source deductions to the Receiver General within the prescribed time; and
e. The bonus is paid to the Shareholder/Manager on or before XXXXXXXXXX,
our rulings are as follows:
A. Paragraph 18(1)(a), section 67 and subsection 78(4) of the Act will not apply to prohibit the Corporation from deducting the amount of the bonus in computing its business income for the fiscal year ended XXXXXXXXXX.
B. Pursuant to subsection 5(1) of the Act, the amount of the bonus that will be paid by the Corporation to the Shareholder/Manager must be included in calculating the Shareholder/Manager's employment income for the taxation year in which the amount is paid.
C. The Proposed Transactions, in and by themselves, will not result in the provisions of subsection 245(2) of the Act being applied to re-determine the tax consequences confirmed in the rulings given above.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, Advance Income Tax Rulings, issued by the Canada Revenue Agency (CRA) on May 17, 2002, and are binding on the CRA provided the Proposed Transactions are carried out on or before the described dates.
These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions and without restricting the generality of the foregoing, in no way implies the acceptance by the CRA of the allocation of the proceeds of disposition as described in paragraph 22 above.
Yours truly,
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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