24 February 1995 Internal T.I. 9431027 - DIRECTOR'S BONUSES

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.

		February 24, 1995

	Saint John Tax Services	Head Office
		Rulings Directorate
	Attention:  Dennis Rogers		A. M. Brake
	            Audit Division		(613) 957-8953
		943102

Payment of Director's Fees

This is in reply to your memorandum of November 21, 1994 requesting our comments on a proposal by XXXXXXXXXX to pay $XXXXXXXXXX as a bonus fee to each of its XXXXXXXXXX directors,

XXXXXXXXXX

Our comments

In order for any amount to qualify as a deduction in the computation of income, it must be considered to have been laid out to earn income from a business or property as is required by paragraph 18(1)(a) of the Act and must also meet the reasonableness test provided by section 67 of the Act. The amount, if any, that is considered to be reasonable must be based on the facts of each particular case. In general, when determining whether amounts paid are reasonable, comparisons with like services performed in the same or similar businesses are required. In making this evaluation the following information is usually obtained:

a)the duties performed by that person and the time expended in carrying out these duties,

b)the remuneration of other persons of the same business who have similar types of responsibilities, experience, and skills,

c)the remuneration paid by other businesses of a similar size to persons who render services corresponding to those of the employee concerned.

It might be noted, for example, that amounts would not be considered reasonable if paid to a shareholder who provides no services to the corporation in which he holds shares. Hence, bonuses paid to shareholders other than principal shareholder-managers will be subject to the normal test of reasonableness set out in a) above. If, however, it can be demonstrated that salaries and bonuses paid to persons is to remunerate them for the profits the company has earned that are, in fact, attributable to the special know-how, connections, or entrepreneurial skills of those persons, the test will be considered to have been met.

It would seem to be the case, in the situation that you have presented, that the XXXXXXXXXX directors of the particular corporation are, in fact, very active on a day-to-day basis in managing the affairs of the corporation and, in the absence of some specific reason to warrant the application of section 67 of the Act to disallow amounts on the basis of not being reasonable, we see no reason to suggest that the amounts in question would not be properly deductible in computing the income of the corporation.

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch