25 July 1989 Income Tax Severed Letter AC73992 - Reclassification of Wages as Dividends

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.

SASKATOON DISTRICT OFFICE               Specialty Rulings
L. Murray                                 Directorate
Public Affairs Officer                  J.D. Jones
First Floor                             (613) 957-2104

Reclassification of Wages               7-3992
as Dividends

This is in reply to your memorandum of June 7, 1989 wherein you requested our opinion on the reclassification of wages as dividends in the following situation.

                     24(1)

You have asked for our opinion as to whether or not, in the above situation, the corp(oration has the option to reclassify salary to dividends at the corporation's year end.

Employment income and dividend income are derived from two separate and distinct sources. Employment income received by an employee is a valuable consideration for services he renders under a written or verbal employment contract. Dividend income received by shareholders is, in our view, a pro-rata distribution by a corporation among its shareholders of its income or capital gains, as consideration for the capital the shareholders have invested by buying shares of the corporation.

In any given situation the Department's position is that where the facts clearly indicate that amounts paid as dividends are on account of or in lieu of salary, those amounts will be considered to be employment income pursuant to subsection 6(3) of the Income Tax Act. In the situation outlined in your memorandum, it appears that the facts clearly indicate that the amount paid are on account of salary and as such should be considered to be employment income.

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. Mr. R. Roy, ADM Policy and Systems Branch