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 paragraph 1(j) of IT-189R2 and paragraph 17 of IC 88-2 are contradictory with respect to whether a reasonable salary should be paid to an incorporated professional.
Position: Paragraph 1(j) of IT-189R2 and paragraph 17 of IC 88-2 are not contradictory.
Reasons: Each statement is correct in the context in which the comments are provided.
CTF 2010 November 28, 2010
Reasonable Salary for Incorporated Professionals
Paragraph 1(j) of Interpretation Bulletin IT-189R2 and paragraph 17 of Information Circular 88-2 are contradictory with respect to whether a reasonable salary should be paid to an incorporated professional.(note 1) Which paragraph is correct?
It is our view that paragraph 1(j) of IT-189R2 and paragraph 17 of IC 88-2 are not contradictory; they are correct in the context in which the statements are provided.
In paragraph 1 of IT-189R2, the existence of a written agreement wherein specific provisions determine a reasonable salary for the services performed is considered evidence of an employer-employee relationship between an individual and a corporation used by a practising member of a profession. This is but one possible factor in the determination whether or not income should be reported by the individual rather than by the corporation.
In contrast, the example in paragraph 17 of IC 88-2 describes a situation where no salary is paid to a non-arm's-length individual because payment of a salary would increase the amount of a loss that the company will incur in the year. In the context of the general anti-avoidance rule (GAAR) provisions in section 245, it was opined that this would not constitute a misuse of a provision of the Act, or an abuse having regard to the Act as a whole.
(1) Interpretation Bulletin IT-189R2, "Corporations Used by Practising Members of Professions," May 24, 1991, and Information Circular 88-2, "General Anti-Avoidance Rule: Section 245 of the Income Tax Act," October 21, 1988.
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