9 June 1993 Income Tax Severed Letter 9308795 - Salary/Bonuses to Shareholder-manager

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                                   5-930879
XXXXXXXXXX                                         G. Martineau
                                                   (613) 957-8953

Attention: XXXXXXXXXX

June 9, 1993

Dear Sir\Madam:

Re: Bonuses paid to Shareholder-Manager

This is in reply to your letter dated March 26, 1993 wherein you requested our opinion on the deductibility of bonuses payable to an active employee who is also shareholder of the holding company that owns 25% of the operating company where three other individuals own directly or indirectly the other shares of the operating company in equal proportion (25%). These three individuals are inactive in the active business of the company.

The facts which you set out are quite specific and appear to relate to a particular contemplated transaction. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. The procedure for requesting an advance income tax ruling is outlined in Information Circular 70-6R2, published by Revenue Canada, Taxation on September 28, 1990.

However, the rulings are rarely given on questions of fact except in those cases where all the facts and other pertinent information can be obtained and those facts and information are expected to prevail. Moreover, 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. Although, we are unable to provide any binding assurance with respect to the query you have raised, we do provide the following general comments for your information.

Our Comments

Our answer to question 56 at the November 1990 Canadian Tax Foundation Round Table Discussion stated that "the distribution of income will ordinarily be accepted as long as the salaries/bonuses meet the normal test of reasonableness provided at the 1981 Round Table".

The responses to questions regarding the payment of salary and bonuses at the 1981, 1984 and 1990 Canadian Tax Foundation Conferences indicate that, generally, the Department will not challenge the reasonableness of salaries and bonuses paid to employee/shareholders of a corporation when certain conditions are met. See in particular the comments regarding "comparisons with like services" in the answer to question 1 of Q.42 of the 1981 Round Table. These comments continue to reflect the Department's general position in this matter. Ultimately, the final determination of whether the amount of a bonus is reasonable in a particular fact situation involves a number of questions about those facts which can only be resolved after a review of all of the relevant facts of that particular situation. This review is generally carried out by officers from a District Taxation Office.

We trust our comments will be of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch