You may need to be aware of the CRA’s policy on the deductibility of management bonuses based on their position in Technical News No. 22.
Some of the criteria for a bonus to be deductible are:
1. The managers (who are the shareholders) are Canadian residents.
2. The company meets the definition of a Canadian Controlled Private Corporation (CCPC).
3. The bonus payment is made to the shareholders of a CCPC.
4. The manager is actively involved in the day-to-day operations and contribute to the income producing activities of the company from which the remuneration is paid.
In situations where the shares of the operating company are held by a holding company, the CRA has stated that it will not question the reasonableness of the payments made to the holding company as long as the salaries and bonuses are paid to the managers who are the shareholders of the CCPC (either directly or through a holding company).
While this may seem straightforward, some issues may be encountered when payments are made to inactive shareholders of a CCPC. The term “actively involved” is not clearly defined, and the CRA has not commented or provided any extended interpretation of what that might mean.
If you are thinking about giving out management bonuses, talk to your tax adviser to ensure there are no adverse tax consequences.
This blog, and all articles posted by Dome Duong Chartered Accountant, provides information of a general nature and should not be considered specific advice, as each reader’s personal financial situation is unique and fact specific. There are many pitfalls to the strategies discussed above and professional tax advice with your Kelowna accountant is essential.