10 April 1991 Income Tax Severed Letter

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                                        C. Tremblay
                                        (613) 952-1361

                    19(1)

April 10, 1991

Dear Sirs:

Re: Shareholder/Employee Remuneration

This is in reply to your letter of February 19, 1991, wherein you requested clarification of Revenue Canada's administrative position concerning the remuneration of shareholder/employees. You have described a hypothetical situation and have asked for our views regarding the deductibility of the bonuses.

The facts regarding your hypothetical enquiry are as follows:

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You are concerned as to whether or not the Department's position with respect to shareholder-employee bonuses would cause paragraph 18(l)(a) or 18(1)(e) of the Act to be invoked. Accordingly you seek our comments as 24(1)Our Comments

Although you have asked for a technical interpretation, it would appear that a proposed transaction by a particular taxpayer is involved. Thus this matter would appear to be more appropriately the subject of an Advance Income Tax Ruling. We are, however, prepared to provide some general comments.

In our opinion, provided the bonus expenditures were made or incurred for business purposes, are reasonable in the circumstances and are paid on or before the day that is 180 days after the end of the taxation year in which the expense was incurred, the bonuses will generally be deductible in the year of accrual.

As you are aware the reasonableness of a salary or bonus is a
question of fact which can only be determined by a thorough review
of the circumstances of each particular situation.  This type of
review is generally performed by the local District Taxation
Office.  In accordance with the answer to Question 82 of the 1984
Round Table Discussion, the Department will generally give
recognition to a corporation's practice of distributing its profits
to shareholder/employees in the form of bonuses, or to a
corporation's policy of recompensing its shareholder/employees for
profits that are attributable to their special knowledge, skills,
or other contributions.  We are therefore unable to provide
specific confirmation as to the deductibility of the bonuses
mentioned in your example but would suggest take these factors into
consideration in deciding on the amount of bonuses to be charged to
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The conditions stated in subparagraph 12(e) of Interpretation Bulletin IT-109R are relevant. In our view, a resolution in the corporation's minute books should reflect the entire amount of the bonus to be paid

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based on either a fixed amount or a formula established prior to that time and determinable as soon as the financial statements for that taxation year are available.

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The above comments are only expressions of opinion on the application of the Income Tax Act to the above hypothetical situation 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.

We trust our comments are of assistance to you.

Yours truly,

for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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