7 March 1991 Income Tax Severed Letter - Salaries/Bonuses Paid to Shareholders/Managers

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.

Dear Sirs:

Re: Salaries/Bonuses Paid to Shareholders/Managers

This is in reply to your letter of January 3, 1991 wherein you requested clarification of Revenue Canada's administrative position concerning the remuneration of owners/managers in the light of the comments made by Mr. Robert Beith at the November 1990 Canadian Tax Foundation Tax Conference in response to question 56 of the Revenue Canada Round Table Discussion.

You have referred us to the recent Tax Court of Canada decision re: Pioneer Designs Corporation v. The Minister of National Revenue and are enquiring if this case will alter our stated policy on this subject in any way.

Our Comments

The case to which you have referred was decided on the basis of the facts presented at the hearing and should not be viewed as a precedent setting case. Further, the results of this case are not in any way inconsistent with the Department's position as clarified by Mr. Beith at the 1990 Tax Conference. The Court found that, on the facts of the case, the bonuses declared were payable in respect of the services rendered by the directors to the corporation, as opposed to being in respect of their shareholdings or loans outstanding to the corporation and that, after a detailed analysis of the evidence, the bonuses payable could not be considered an artificial reduction to the income of the corporation.

The Department's general practice with respect to this subject will continue to be administered in the manner mentioned in the reply to part 3 of Question 42 of the Revenue Canada, Taxation Round Table discussion of 1981. Subject to the bounds of reasonableness with respect to both the level of salary and bonuses for services performed and the rate of return on investment in shares, the Departments' policy would extend to situations where the principal shareholder/managers form part of a related group which controls directly and indirectly the active business. The Department's stated policy, however, does not extend to such remuneration paid to corporate shareholder/managers.

The above comments are only expressions of opinion on the application of the Income Tax Act to the facts presented by you and as such should not be construed as advance income tax rulings, nor are they binding on the Department. Should you require an advance ruling with respect to a specific situation please follow the procedure described in Information Circular IC 70-6R2 [Information Circular 70-6R2].

We trust our comments are of assistance to you.