31 May 2006 External T.I. 2006-0168181E5 - Deceased Shareholder's Bonus

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: What are the tax implications of the receipt of a bonus by the estate of the deceased shareholder of the corporation?

Position: Question of fact.

Reasons: Where the employer has a contractual obligation to pay a bonus annually or on some other periodic basis, but the bonus for the period has not been declared as of the date of death, the amount is considered to be a periodic payment of remuneration taxable under subsection 70(1) of the Act.

							2006-016818
XXXXXXXXXX 						Luisa A. Majerus, CA
(613) 832-3488
May 31, 2006

Dear XXXXXXXXXX:

Re: Deceased Shareholder's Bonus

We are writing in reply to your letter dated January 19, 2006, requesting a technical interpretation in respect of an amount paid by a Canadian controlled private corporation ("CCPC") to a deceased shareholder's estate.

Specifically, you are requesting our opinion on the taxation of the amount declared and paid under the following hypothetical set of facts:

1. The common shares of CCPC are owned by Mr. A and Mr. B equally.

2. Mr. A and Mr. B are not related.

3. Mr. A and Mr. B are both active in the operations of the business.

4. CCPC's year end was July 31st, 2005.

5. CCPC has always declared and paid bonuses to the shareholders/managers.

6. Mr. A died on May 31st, 2005.

7. A bonus was declared on July 31st, 2005 and paid in January of 2006.

You are requesting whether the amount is to be included in income in the deceased shareholder's final return, a rights and things return or in the estate's return.

Our Comments

Generally, where an employee has an enforceable claim as at the date of death against the employer for the amount of the bonus declared, the value of that right at the date of death would be considered a "right or thing" within the meaning of subsection 70(2) of the Income Tax Act (the "Act"). However, where the employer has a contractual obligation to pay a bonus annually or on some other periodic basis, but the bonus for the period has not been declared as of the date of death, the amount is considered to be a periodic payment of remuneration taxable under subsection 70(1) of the Act.

Further, as noted in Income Tax Technical News #22 and 30, it is our general view that where an individual is a shareholder of a CCPC, is a Canadian resident who is active in the day-to-day operations of the CCPC's business and is paid a bonus out of profits of normal business operations, the amount of the bonus is likely reasonable and the deduction to the CCPC will be allowed. Please note however, that this general policy does not apply in situations such as that described above and we reserve the right to challenge the reasonability of the amount paid under section 67 of the Act.

We trust this information is helpful.

Yours truly,

Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch