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.
Canadian Petroleum Tax Society Roundtable
June 7, 1995
Question 6
SALARIES PAID OUT OF INVESTMENT INCOME
The Federal Budget of February 27, 1995 proposes to increase refundable taxes on investment income of private corporations. The stated purpose of these additional taxes is to eliminate tax deferral by investment holding companies. One way of removing investment income consisting of such things as interest and foreign source dividends is by way of salaries. A concern is that such salaries be "reasonable" for purposes of section 67 of the Income Tax Act.
Would Revenue Canada please provide some guidance as to how it will interpret the term "reasonable" when salary is paid from investment income in these circumstances to the major shareholder and officer of an investment holding company? (Note that the question is not directed to the situation where the salary is used as a mechanism for income splitting).
DEPARTMENT'S POSITION
The Department was asked this question at the 1981 Revenue Canada Round Table and our position is unchanged. No specific guidelines have been established to determine the reasonableness of salaries paid to employee-shareholders where a private company earns substantially all its income from property. The amount, if any, that is considered to be reasonable must be based on the facts of each particular case. It is the taxpayer's responsibility to establish the reasonableness of amounts paid. In our view, the avoidance of the payment of refundable taxes on investment income does not establish the reasonableness of salaries paid.
M. Brake
957-2133
5-951163
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