29 September 2003 External T.I. 2003-0034035 - shareholder/manager remuneration

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether the CCRA's administrative position with respect to shareholder/manager bonuses applies in the situation where the source of income for the bonus is partnership income.

Position: Question of fact.

Reasons: A review of each specific situation would determine whether the criteria outlined in ITTN #22 are satisfied.

A. Seidel
XXXXXXXXXX (613) 957-2058
2003-003403
September 29, 2003

Dear Sir:

Re: Shareholder/Manager Remuneration

We are writing in response to your letter dated July 24, 2003, wherein you requested our comments regarding the reasonableness of shareholder/manager remuneration in the context of a Canadian-controlled private corporation ("CCPC") paying salary and bonuses on income the CCPC earned as a partner in a partnership.

You describe a situation where an individual, who is a Canadian resident shareholder (the "Shareholder"), owns all of the shares of Holdco, a CCPC, which in turns owns all of the shares of A Ltd., also a CCPC. A Ltd. is a general partner in several "Canadian partnerships", as defined in subsection 102(1) of the Act, and all of its income is derived from its interest in these Canadian partnerships. The Shareholder is actively involved in the management of A Ltd. and in the income earning activities of the Canadian partnerships. A Ltd. proposes to pay salary and bonuses to the Shareholder equal to the income that A Ltd. receives from its interests in the various partnerships. You query whether the administrative position of the Canada Customs and Revenue Agency's ("CCRA") concerning shareholder/manager remuneration, as outlined in Income Tax Technical News #22 ("ITTN #22"), would apply in this scenario.

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. To the extent that you require confirmation of the tax consequences of proposed transactions involving specific transactions, you should be requesting an advance income tax ruling. However, we would point out that advance income tax rulings are not provided in respect of transactions that are substantially completed. Completed transactions are reviewed by the local tax services office.

Although we cannot provide any specific comments with respect to the situation described in your letter, the following general comments may be of assistance.

As outlined in ITTN #22, the CCRA will generally not challenge the reasonableness of salary or bonuses paid by a CCPC to a Canadian resident shareholder/manager that is actively involved in the day-to-day operations of the corporation. Whether or not a shareholder/manager is actively involved in the day-to-day operations of a CCPC is a question of fact that can only be determined by reviewing all of the particulars relating to a specific situation. In general, it is our view that managing a CCPC's interest in one or more Canadian partnerships, as a "general" partner, and being involved in the day-to-day operations of the partnerships, would be sufficient to satisfy the requirement that the Shareholder be actively involved in the day-to-day operations of the CCPC.

Where the CCPC's investment in the Canadian partnership(s) is as a "limited" partner, it would be a question of fact whether or not the Shareholder is actively involved in the day-to-day operations of the CCPC. Where all of the income earned by the CCPC is partnership income attributable to the limited partnership interests, and it is determined that the Shareholder is actively involved in the day-to-day operations of the CCPC, the CCRA's position in ITTN #22, with respect to the reasonableness of salaries and bonuses paid to shareholder/managers, would also apply where the CCPC is a limited partner of the partnerships.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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