5-903675
Dear Sirs:
Re: Reasonableness of Bonuses Paid to Inactive Shareholders
We are writing in reply to your letter of December 18, 1990 concerning a payment by a partnership of a bonus to an active shareholder of a corporate partner and subsequent gifting to inactive shareholders of the other corporate partners.
You describe a hypothetical situation where three corporations are the partners in a partnership carrying on an active business in the land development business. One corporation is wholly-owned by a brother, another is wholly-owned by a sister and the third corporation is wholly owned by another sister. The brother manages all three corporations and the sisters are inactive. It is proposed that a bonus equal to virtually the entire profit of the partnership be paid by the partnership to the brother and that he gift to his sisters an amount equal to the after-tax amount that his sisters would have received had the bonus been paid directly to them. Alternatively, the partnership might instead allocate virtually all of its profits to the brother's wholly-owned corporation which would, in turn, pay a bonus of equal amount to him. The brother would then make the gifts. You request our comments regarding various issues.
Our Views
1. The administrative position described in question 82 of the 1984 Revenue Canada Round Table continues to apply to a bonus paid by a corporation to its principal shareholder-manager, but it does not apply to a bonus paid by a partnership to the shareholder of one of its corporate partners. Distribution of partnership income must be made in accordance with the existing partnership agreement.
2. The deductibility by the partnership of a bonus paid to the brother, providing he is an employee of the partnership, would be dependent on the conditions in paragraph 18(1)(a) and section 67 of the Income Tax Act (the Act) being met. In determining the reasonableness of the bonus for purposes of section 67 of the Act the comments in question 42 of the 1981 Revenue Canada Round Table may be of assistance to you.
3. Gifts made by a brother to his over age 18 sisters would not ordinarily be taxable in the sisters' hands.
4. The attribution rules in section 74.1 of the Act do not apply to gifts made by a brother to his sisters who are 18 or older.
5. We are not in a position to comment upon your statement that no tax will be payable by the partnership or any of the corporations in respect of the bonus. The tax consequences can only be determined after all the facts and details have been established and reviewed.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
We trust these comments will be of assistance.
Yours truly, for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch