8 October 1999 Internal T.I. 9924767 - INCORPORATING A TRUCKING BUSINESS

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.

Principal Issues: Whether a sole proprietorship can incorporate his trucking business.

Position: There is nothing in the Income Tax Act that prevents a sole proprietorship from incorporating.

Reasons: Per IC 88-2, GAAR will not be applied even if sole reason for incorporating is to claim the small business deduction.

October 8, 1999

	Hamilton Tax Services Office	HEADQUARTERS
	Business Files Audit		J. Gibbons
(613) 957-8953
	Attention: Will Clarke
							7-992476

XXXXXXXXXX (the "taxpayer")

This is in response to your memorandum of August 17, 1999, in which you requested our opinion concerning the incorporation of the taxpayer's trucking. business. The taxpayer will be the sole officer, director, and shareholder of the corporation. He will be paid a salary which will approximate, on an annual basis, the net income of the company.

There is nothing in the Income Tax Act that prevents a taxpayer from incorporating a proprietorship. In this regard, we refer you to paragraph 11 of Information Circular IC 88-2, which confirms this view. This assumes that the corporation will, in fact, be carrying out the business XXXXXXXXXX.

It is a question of fact whether the amount of salary paid by the corporation to the taxpayer is a deductible business expense. The expense must be incurred for the purpose of earning business income (paragraph 18(1)(a)) and the amount must be reasonable in the circumstances (section 67). At the 1991 Revenue Canada Round Table Discussion, the Department stated that it has a long-standing practice not to challenge the reasonableness of salaries or bonuses paid to a principal shareholder who is active in the corporation's business and the corporation has established either 1) a practice of distributing profits in this manner, or 2) a policy of declaring bonuses to shareholders to remunerate them for the profits the corporation has earned that in fact are attributable to the expertise, skills, and services that are provided by the shareholder.

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch