13 July 1990 Ministerial Correspondence 901274 F - Money Gifted

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.

July 13, 1990

Dear Sirs: 

Re:  Money Gifted

This is in reply to your letter of June 11, 1990 in which you asked for our opinion and our comments concerning the application of the Income Tax Act (the "Act") in the following hypothetical situation:

1.     Mr. A and Mr. B each own 50% of a Canadian Controlled Private  Corporation.

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

3.     The corporation is a small business corporation and is very profitable.

4.     Mr. A is chief executive and manager of the company.

5.     Mr. B has a non-related full time job.  He is not active in the business on a day to day basis but as a director does provide some management direction.

6.     The corporation is following the practice of paying a bonus only to Mr A.  The bonus is significant.

7.     One half (1/2) of the after tax bonus will be gifted by Mr. A  to Mr. B .

8.     There is no written documentation that requires Mr. A to gift Mr. B the money referred to in item 7.

It is your conclusion that section 3, subsection 15(1) and subsection 56(2) of the Act would not apply to the above transaction and that the money received by Mr. B would not be taxable to him.

Our Comments

The situation that is described above appears to involve a series of actual proposed transactions.  It is not the Department's practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R.  Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R for the procedure to be followed.  Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

The Department will look at all the facts and examine the true intention of the parties to the particular transactions before making a determination as to what sections should or should not apply.  We note that written document is not necessary for a contractual obligation to exist.

A bonus payment must be incurred for business purposes and be reasonable in the circumstances, otherwise it may be subject to disallowance under section 67 of the Act.  A determination of the reasonableness of the amount of remuneration paid to any particular shareholder-employee requires consideration of the duties performed by the individual, as well as the time spent in carrying out those duties.  The reasonableness of a salary or bonus in a question of fact which can only be determined by a thorough review of the circumstances of each particular situation.

A gift of funds from one shareholder to another could invoke subsection 15(1) of the Act to tax the benefit conferred, whether or not such funds were paid with after-tax dollars.  This would be particularly so where the purported gift is repeated on an annual or other periodic basis.  The provisions of subsection 245(2) and 56(2) of the Act may have application depending on the facts of the particular case.

The rules in subsection 15(1) are supplemented by, and should be read in conjunction with, the provisions in subsection 56(2), (see IT-335), 245(2) and 245(3) in so far as they relate to indirect payments or transfers made by a corporation for the benefit of a shareholder or a benefit that the shareholder desired to have conferred on some other person.

Although we are unable to give you any definite answers, we trust the above comments will be helpful.

Yours truly,

for Director Business and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch