Shareholder Bonuses May Not Be Deductible

A very useful tax planning technique for Canadian Controlled Private Corporations (CCPC's), is to annually bonus down the taxable income of the corporation to the Small Business Deduction Limit. This means the corporation pays an additional salary to the shareholders, which is deductible to the corporation and regular salary income to the shareholders, in order to optimize overall tax efficiencies.

Click HERE and HERE for more information on the tax advantages of bonuses.

Note that CRA is always concerned with the reasonability of amounts paid out of a corporation for salaries. CRA has a policy that salaries paid to active shareholders and managers in the daily operations of a Canadian-controlled Private Corporation would not be subject to the reasonability assessment. However, CRA does not extend this policy to non-active shareholders or managers, nor to shareholders or managers that are not active in daily operations, nor to corporations that are not Canadian-controlled Private Corporations. CRA has also noted that they do not extend this policy to remuneration paid from a source of income that is not generated from normal, ongoing business operations. For example, income generated from a major sale of business assets is not considered earned during the normal course of operations. This is not to say that CRA will deny the reasonability of the remuneration in this case. Merely they reserve the right to review the reasonableness of the amount.

CRA has issued a Technical Interpretation on income generated from a major sale of business assets. The facts had a company with seven shareholders, only two of which were actively involved in the day to day operations and received salary income. In that Interpretation, only the two shareholders were able to receive bonuses of the income generated on the major sale of the business assets. The other shareholders would receive their share of the sale proceeds as dividends. This creates a problem from a tax efficiency perspective. The other five shareholders receive dividends which are not tax deductible to the corporation and therefore some overall tax inefficiencies would be realized. Click HERE for more on tax efficiencies on business income of CCPC's and bonusing down to the Small Business Deduction Limit.

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