30 October 1989 External T.I. 58560 F - Deductibility of Bonuses Paid to Shareholders

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.

October 30, 1989

Dear Sirs:

This is in reply to your letter of August 22, 1989, concerning the deductibility of bonuses paid to shareholders.

You described the following hypothetical situation.

(1)      Company A is a Canadian-controlled private corporation.

(2)      Company A carries o an active business and earns in excess of $200,000 per year.

(3)      Company A is owed 100% by a family group consisting of children of the company's founder.  No child individually owns greater than 20% of Company A and each shareholder owns an equal percentage of the Company.

(4)      Key management of Company A consists of shareholders active in day to day operations of the company.  However, certain shareholders are either inactive or employed by Company A in other than key management positions.

Our comments respecting your questions are as follows:

(A)      The Department's position as set out in question 82 of the 1984 Revenue Canada Round Table would apply where the shareholder-managers are immediate family members provided the conditions therein are met.

(B)      We agree that where equal bonuses are paid to all shareholder-employees and these shareholders make gifts to the non-active shareholders, section 67 of the Act could apply to deny a deduction to the extent the bonuses exceed a reasonable amount.

(C)      The Department's 1984 Round Table position would not apply where there is legal agreement which stipulates the amount and the terms of the gift.  In such a situation, the tax consequences could only be determined after all the details of the arrangement has been established and reviewed.

We trust our comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch