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.
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C.G.-Toussaint 613-995-1327
January 9, 1980
Dear Sir:
This is in reply to your letter of October 29, 1979 concerning two subjects covered by our Mr. J. Stacey in his speech at Jasper Park Lodge the 18th of October 1979. We apologize for the delay.
Regarding estate freezing situations, our Department will not give advance income tax rulings for situations where separate classes of shares are issued to the freezor's wife and children and a separate class of shares to the freezor.
It is well established by the court that in considering whether a particular transaction brings a party within the terms of the Income Tax Act, its substance or nature including its form is to be regarded. Employment income and dividend income are derived from two separate and distinct sources. Employment income received by an employee is a valuable consideration for the services he renders under a written or verbal employment contract. Dividend income received by a shareholder is in consideration for the capital he has invested by buying shares of the corporation.
In the case of an employee-shareholder, it is our view that a reasonable compensation for the services he renders as an employee should be paid. The fact that the employee-shareholder opts to have this compensation by way of dividends instead of salary will not change the nature of the compensation. Accordingly, where all the facts of a particular situation point to the conclusion that the dividend an employee-shareholder receives is in consideration for the services he renders as an employee, this income, in our opinion, would be taxable as employment income pursuant to subsection 6(3) of the Income Tax Act.
Yours truly,
for Director Corporate Rulings Division Corporate Rulings Directorate Legislation Branch
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