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: Are amounts paid by a Farm Corporation to a husband and wife, who are the sole directors, officers and shareholders, considered a reasonable retiring allowance and bonus?
Position: Yes.
Reasons: In accordance with guidelines provided in Question 10 at the 1992 Prairie Tax Conference Round Table and prior rulings given in similar circumstances.
XXXXXXXXXX 2008-030509
XXXXXXXXXX , 2009
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling - Retiring Allowance
XXXXXXXXXX (the "Employer")
XXXXXXXXXX ("Employee 1")
XXXXXXXXXX ("Employee 2")
This is in reply to your letter of XXXXXXXXXX and facsimile of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above noted Employer, Employee 1 and Employee 2 (collectively the "Employees").
We understand that, to the best of your knowledge and that of the Employer and the Employees, none of the issues involved in the ruling request is:
(i) in an earlier return of the Employer or the Employees or a person related to
the Employer or Employees,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Employer or the Employees or a person related to the Employer or Employees,
(iii) under objection by the Employer or the Employees or a person related to the Employer or Employees,
(iv) before the courts, or
(v) the subject of a ruling previously issued by the Directorate to the Employer or the Employees or a person related to the Employer or Employees.
Definitions and Abbreviations
1. All terms used herein that are defined in the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof (the "Act") have the meaning given in such definitions unless otherwise indicated.
2. All capitalized terms used herein have the meanings assigned herein.
Facts
3. The Employer and Employees live near XXXXXXXXXX . Their mailing address is XXXXXXXXXX . They deal with the XXXXXXXXXX Tax Services Office and file their income tax returns with the XXXXXXXXXX Tax Centre. The Employer's Business Number is XXXXXXXXXX .
4. The Employees incorporated the Company in XXXXXXXXXX and were the sole directors, officers and shareholders. The company was incorporated to operate a ranching and farm management consulting business. The Employees began working full time on the farm in XXXXXXXXXX and had no other outside employment with the exception of XXXXXXXXXX . In XXXXXXXXXX , Employee 2 worked part-time from home for a third party.
5. The Employer began paying Employee 1 in XXXXXXXXXX and Employee 2 in XXXXXXXXXX .
6. The Employees' compensation for the last 5 years has been as follows:
Employee 1
2004 $XXXXXXXXXX
2005 $XXXXXXXXXX
2006 $XXXXXXXXXX
2007 $XXXXXXXXXX
2008 $XXXXXXXXXX
This totals $XXXXXXXXXX over 5 years. Employee 1 has not benefited from any pension plan or deferred profit sharing plan in conjunction with his farm employment for the Employer.
Employee 2
2004 $XXXXXXXXXX
2005 $XXXXXXXXXX
2006 $XXXXXXXXXX
2007 $XXXXXXXXXX
2008 $XXXXXXXXXX
This totals $XXXXXXXXXX over 5 years. Employee 2 has not benefited from any pension plan or deferred profit sharing plan in conjunction with her farm employment for the Employer.
7. Employee 1 provided XXXXXXXXXX years of service to the Employer with unpaid labour for XXXXXXXXXX of those years. Employee 2 provided XXXXXXXXXX years of service to the Employer with unpaid labour for XXXXXXXXXX of those years. The Employees participated fully in the labour and management of the farming operation at all time during this period.
8. The Employer is liquidating its farming operation and will no longer need the services provided by the Employees. The Employees will retire by or on XXXXXXXXXX .
Proposed Transactions
9. The Employer proposes to pay, on or after retirement, each of Employee 1 and Employee 2 a retiring allowance of $XXXXXXXXXX for their XXXXXXXXXX years of service.
10. The Employees propose to have the full amount of the retiring allowance transferred into a registered retirement savings plan ("RRSP") pursuant to paragraph 60(j.1) of the Act.
11. The Employer proposes to pay to each of Employee 1 and Employee 2 a bonus of $XXXXXXXXXX .
Purpose of the Proposed Transactions
12. The Employer would like to make the payments to Employee 1 and Employee 2 in recognition of the long service they have provided.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the transactions are completed as proposed, we rule as follows:
A. The amount of $XXXXXXXXXX to be paid to each of the Employees will qualify as a retiring allowance as defined in subsection 248(1) of the Act and will be included in the Employees' income under subparagraph 56(1)(a)(ii) of the Act in the year in which it is paid.
B. The proposed payment of $XXXXXXXXXX to each of the Employees' RRSP will be deductible by the Employees pursuant to paragraph 60(j.1) of the Act.
C. The amount of $XXXXXXXXXX paid to each of the Employees will be deductible by the Employer in computing income from the business of farming for the year in which it is paid and will be considered reasonable for the purposes of section 67 of the Act.
D. The amount of $XXXXXXXXXX paid to each of the Employees will be deductible by the Employer in computing income from the business of farming for the year in which it is paid and will be considered reasonable for the purposes of section 67 of the Act.
The above income tax rulings are based solely on the facts and proposed transactions described above and do not depend on any other information made available to the Canada Revenue Agency ("CRA"), whether such information was provided by way of additional documentation submitted with the ruling or otherwise. Any reference in this letter to such other information is made solely for the convenience of the reader.
Further, nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any of the tax consequences relating to the facts and proposed transactions described above other than those specifically described in the ruling.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are implemented by XXXXXXXXXX .
Yours truly,
for Director
Financial Sector and Exempt Entities Division
Income Tax rulings Directorate
Legislative Policy and regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2009
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2009