28 April 2005 External T.I. 2005-0115691E5 - Shareholder vs. Employee Benefits

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.

Principal Issues: An individual is both an employee and a shareholder of a corporation. What is necessary in a contract of employment to deem benefits received to be by virtue of employment, rather than shareholdings?

Position: Question of fact

Reasons: Where an individual who is both a shareholder and an employee receives a benefit and equivalent benefits are not available to all employees, the individual is generally considered to be in receipt of a shareholder benefit taxable under subsection 15(1). However when an equivalent benefit is extended to all employees, including employees who are shareholders, the benefit provided to the employee/shareholder is normally considered an employment benefit rather than a shareholder benefit.

XXXXXXXXXX 2005-011569
Kathryn McCarthy, CA
April 28, 2005

Dear XXXXXXXXXX:

Shareholder vs. Employee Benefits

This is in reply to your facsimile dated February 10, 2005, concerning the above noted subject matter.

You described a situation where an individual is both an employee and a shareholder of a corporation. You enquired as to what is necessary in a contract of employment to deem benefits received to be by virtue of employment, rather than shareholdings, under the Income Tax Act (the Act).

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following general comments.

Whether a benefit is received by an individual by virtue of employment or shareholdings is always a question of fact. However, where an individual who is both a shareholder and an employee receives a benefit and equivalent benefits are not available to all employees, the individual is generally considered to be in receipt of a shareholder benefit taxable under subsection 15(1) of the Act. Any expense incurred by a corporate employer for a shareholder benefit is not deductible by the corporate employer.

On the other hand, when an equivalent benefit is extended to all employees, including employees who are shareholders, the benefit provided to the employee/shareholder is normally considered an employment benefit rather than a shareholder benefit. Similarly, when all employees of a corporation are shareholders and it is reasonable to conclude that the benefit has been provided as part of a reasonable remuneration package, the benefit is considered to be an employment benefit rather than a shareholder benefit. A benefit would be considered reasonable where it is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size. In such cases, the employment benefit is generally included in the employee/shareholders' income by virtue of paragraph 6(1)(a) of the Act. A corporate employer is generally entitled to a deduction in respect of expenses incurred to provide an employment benefit, subject to any limitations imposed under the Act.

We trust these comments are helpful.

Yours truly,

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