30 October 1989 Income Tax Severed Letter AC58560 - Deductibility of Bonuses Paid to Shareholders

19(1)                                          5-8560
                                               W.P. Guglich
                                               (613) 957-2102

October 30, 1989 Dear Sirs:

This is in reply to your letter of August 22, 1989, concerning the deductibility of bonuses paid to shareholders.

You described the following hypothetical situation.

(1) Company A is a Canadian-controlled private corporation.

(2)      Company A carries o an active business and earns in
         excess of $200,000 per year.

(3)      Company A is owed 100% by a family group consisting of
         children of the company's founder.  No child
         individually owns greater than 20% of Company A and each
         shareholder owns an equal percentage of the Company.

(4)      Key management of Company A consists of shareholders
         active in day to day operations of the company. 
         However, certain shareholders are either inactive or
         employed by Company A in other than key management
         positions.

Our comments respecting your questions are as follows:

(A)      The Department's position as set out in question 82 of
         the 1984 Revenue Canada Round Table would apply where
         the shareholder-managers are immediate family members
         provided the conditions therein are met.

(B)      We agree that where equal bonuses are paid to all
         shareholder-employees and these shareholders make gifts
         to the non-active shareholders, section 67 of the Act
         could apply to deny a deduction to the extent the
         bonuses exceed a reasonable amount.

(C)      The Department's 1984 Round Table position would not
         apply where there is legal agreement which stipulates
         the amount and the terms of the gift.  In such a
         situation, the tax consequences could only be determined
         after all the details of the arrangement has been
         established and reviewed.

We trust our comments will be of assistance.

Yours truly, for director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch