29 November 1993 Administrative Letter 9324456 F - RS&DE

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.

Audit Programs DivisionRulings Directorate Specialized Audit Programs M. Lambert Section

Attention to:  Ms. Mara Praulins Acting Chief

Scientific Research and Experimental Development Bonuses and Remuneration Based on Profits

This is in response to your memorandum of August 26, 1993, requesting our opinion on the meaning of "a remuneration based on profits or a bonus" for purposes of subsection 37(8) of the Income Tax Act (the "Act") and section 2900 of the Income Tax Regulations (the "Regulations"). We apologize for the delay in responding to your request.

OUR OPINION

1.     There is no specific definition of the word "bonus" in the Act or in the Regulations. In Shelford v. Mosey, (1917) 1 K.B. 154 C.A., it was established that

"a bonus may be a mere gift or gratuity as gesture of goodwill, and not enforceable. Or it may be something which an employee is entitled to on the happening of a condition precedent and is enforceable when the condition is fulfilled. (...) But in both cases it is something in addition to or in excess of that which is ordinarily received."

2.     In the French version of the Act, the Parliament used the term "gratification" for bonus. This term has never been defined by the Courts. The dictionary gives the following meaning to the term "gratification":

"Somme d'argent donnée à quelqu'un en sus de ce qui lui est dû."

3.     According to the Bulletin de terminologie comptable, a document published by the Ordre des comptables agréés du Quèbec, the word "bonus" in English contains three notions:

a)     an amount paid for a superior performance,

b)     an amount paid in compensation for dangerous work conditions,

c)     a reward without any reference to the performance of the employee.

According to the C.A. publication, the term "gratification" in French is used just to designate a reward without any reference to the performance of the employee.

4.     For purposes of draft section 37 of the Act and draft section 2900 of the Regulations, we are of the opinion that a bonus (or in French a "gratification") means a reward without any reference to the performance of the employee. The question of whether or not an amount is paid to an employee by reference to his/her performance is a question of fact.

We are also of the opinion that the number of times in a year that a bonus is paid does not, by itself, affect our interpretation of the term "bonus".

5.     Concerning a "remuneration based on profit", we are of the opinion that this expression means every remuneration to an employee that is conditional to the profit of the business or that is a portion of the profit of the business.

6.     You have submitted three situations of fact and you request our opinion for each of them. The first situation is as follows:

The taxpayer puts through an adjustment for salaries/wages that in effect reduces the company's taxable income below the annual business limit.

Unless there is evidence in the minute book that states that this is a bonus or remuneration based on profits, your auditors are hesitant to treat it as a bonus or remuneration based on profits.

Generally, we consider this kind of remuneration as deductible because it is an amount paid for the services of an employee. In that case, we are of the opinion that this amount is not a "reward paid without any reference to the performance of the employee". Therefore, we agree with your auditors that this is not a bonus for purposes of subsection 37(8) of the Act and section 2900 of the Regulations.

If the amount is just an amount given to an employee to reduce the profit of a company under $200,000 (as, as example, to employees not dealing at arm's length with the employer, without performance requirements), we are of the opinion that this is not an expense made for the purpose of gaining or producing income and, therefore, is not deductible under paragraph 18(1)a) of the Act.

7.     The second situation is as follows:

The taxpayer is not in a strong financial position and therefore cannot pay the shareholder/employee what this person might otherwise have been paid. At the end of the year, if it is financially feasible, the salary is increased and the taxpayer's position is that this is simply a catch up for the short fall during the year.

Again, your auditors are hesitant to treat these amounts as bonuses or remuneration based on profits.

We are of the opinion that these amounts are conditional to the profit of the business and therefore are remunerations based on profit.

8.     Your last situation as referred by XXXXXXXXXX reads as follows:

In a portion of my software development clients, arm's length employees are paid salary adjustments based on their production for the quarter or trimester. These are part of the formal performance review process and are often referred to as "performance payments". Effectively, at the beginning of a quarter or trimester, the employee determines certain technical milestones or progress objectives with the project coordinator. At the end of the quarter or trimester, the employee's actual performance is measured against the predetermined objectives and the employee is entitled to a payment for the quarter of somewhere between $1,500 and $5,000. These payments are considered retroactive performance adjustments: however, the payments do not reflect a permanent adjustment to the base salary. This is separate from any bonuses based upon profits and separate from other bonuses determined by the Board of Directors.

In this case, amounts are paid for the good performance of the employee. Therefore, we are of the opinion that these amounts are not bonuses for purposes of subsection 37(8) of the Act and section 2900 of the Regulations.

We hope that these comments will be of some assistance.

Section ChiefManufacturing Industries, Partnerships and Trusts SectionManufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch