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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Salary/Dividend Mix
This is in reply to your letter of October 30, 1992 in which you requested our verbal opinion on one aspect of a fact situation involving certain proposed transactions of unidentified taxpayers. You had stated that your intention was to subsequently submit a request for an advance income tax ruling.
Our Comments:
Confirmation as to the income tax consequences of proposed transactions can only be given in the context of an advance income tax ruling. Although we are unable to provide any opinion in respect of the specific case you have described, we have set out below some comments of a general nature on the subject of bonuses versus dividends.
Our comments relate to the following hypothetical situation. A shareholder owns redeemable preferred shares in a corporation in which he is a director. The shareholder wishes to convert, in some manner, a portion of his entitlement to a redemption amount, to a "bonus". The major concern is whether such bonus would be considered to be unreasonable and thus be denied as an expense to the corporation.
The Department has responded to questions on the reasonableness of the amount of salaries and bonuses at several Canadian Tax Foundation Conferences and the position stated at the 1981 Conference remains valid. The amount, if any, that is considered to be reasonable must be based on the facts of each particular case. A determination of the reasonableness of the amount of remuneration paid to any particular shareholder-employee requires consideration of the duties performed and the time spent in carrying out those duties. At the 1982 Conference, the Department stated that it will generally give recognition to a corporation's practice of distributing its profits to shareholder- employees or employees in the form of bonuses, or to a corporation's policy of recompensing its shareholder-managers for profits that are attributable to their special knowledge, skills, connections or other contributions. Our favourable response was intended to apply to distributions of profits rather than conversions of share rights to bonuses. In the hypothetical situation, the amount of bonus would be determined on the basis of share rights rather than on the basis of contributions to the corporation by the recipient. Accordingly, it is our view that section 67 of the Income Tax Act would deny the bonus as an expense of the corporation by virtue of not being a reasonable amount.
These views were conveyed in our conversations (Brooks/XXXXXXXXXX) of January 19, 1993 and February 3, 1993 during which you stated that you would not be submitting a request for an advance income tax ruling as you had decided not to proceed with the proposed transactions.
We trust that our views have been of assistance.
Yours truly,
R. Albert for Director Business and General Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch
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