2 August 1985 Income Tax Severed Letter 5-7786 - [Reasonableness of Bonus Payments]

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.

XXXX

A.A. Cameron 995-1787

August 2, 1985

Dear Sirs:

Re: Reasonableness of Bonus Payments

We are writing in response to your letter of June 24, 1985 in which you request confirmation of the deductibility of certain bonuses payable.

The reasonableness of a salary or bonus is a question of fact which can only be determined by a thorough review of the circumstances of each particular situation. This type of review is generally performed by the local District Office and we are therefore unable to provide specific confirmation as to the deductibility of the bonuses outlined in your letter. However, the comments made by the Department on this subject at the 1981 and 1984 Canadian Tax Foundation Conferences continue to reflect the Department's position.

Generally, to determine the reasonableness of salaries paid to employees - shareholders comparisons with like services performed in similar businesses are required. Information to be considered would include: the duties performed by the employee and the time expended in carrying out these duties, and remuneration paid by other businesses of a similar size to employees who render services corresponding to those of the employee concerned.

In the case of principal shareholder-managers of a corporation, the Department generally will not consider their remuneration excessive in the following circumstances: the corporation's normal practice is to distribute its profits to these individuals in the form of bonuses or additional salary, or the corporation has a policy of declaring bonuses to the shareholder - managers for corporate profits stemming from special knowledge, skills or connections, etc. of that person. It would not be considered reasonable for a shareholder who provides little or no services to the corporation to receive a large bonus.

Your letter indicates that the client company has declared substantial bonuses payable to the shareholders in prior years and, therefore, a history of such declarations exists which could be reviewed by our applicable District Office upon your request.

We regret we can not be of more assistance but hope you will find this information helpful.

Yours truly,

for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch