Chapter 13:

Employee Remuneration
Salaries and Bonuses and Other Payments to Shareholder Manager
 Most of the time, a Canadian Controlled Private Corporation’s (CCPC) controlling
shareholder is also the president, CEO, or Director of that corporation.
 This enables the shareholder with choices for designing the compensation package to
minimize income taxes (such as salary vs. dividends)
 The Tax Court of Canada set the criteria for deducting salaries and bonuses
o Reasonableness of the bonus in relation to profit and services rendered;
o Payment for real and identifiable service;
o Reasonableness of the time between determining profit and establishing the
bonus;
o A legal obligation to pay the accrued bonus
 When employee remuneration is unpaid 180 days after the end of the employer’s fiscal
period, the amount is deductible only in the employer’s fiscal period in which the
amount is actually paid – accrual method denied to employer on amounts paid after 179
 For amounts, other than remuneration (i.e. royalties), owed to a non-arm’s length
person can be accrued by the corporation as an expense in one year and paid up to two
years after tax year  giving an immediate expense deduction to the corp.
o If this amount is not paid within the end of the second tax year, the corp. cannot
defer the tax, instead it is added back to income in the third tax year
o This will lead to a double taxation consequence unless the corp. and the
shareholder manager file an agreement on or before the date of the tax return
due date for the third tax year which deems the amount has been paid on the
first day of the third tax year
o If this agreement is filed late, 25% of the unpaid amount if added back in the
third year to the corp.’s income permanently
 If there is no legal obligation to pay the amount, the deduction will only be allowed in
the year of payment and not the year of accrual
o This liability should be recorded in the minutes of the director’s meeting prior to
year end
o Amount should NOT be contingent on an event
Shareholder Benefits and Loans:
 Benefited granted to shareholders must be included in their income as property income
 A benefit is determines by the ‘bona fide transaction’ which occurs when a shareholder
deals with the corporation in the same manner or capacity as a customer or supplier
 The value of this benefit is determined by the actual value of the property rather than
the equivalent rental FMV  which is included as income by the shareholder
 Incurring and repaying debt is considered capital transaction
 However for non-corporate shareholders or person’s not at arm’s length who received
loans or other indebtedness must include this in income the year the loan was made,
exclusions for this rule include:
 1. loans made in the ordinary course of the lender’s business
 For principal loan to be excluded, bona fide arrangements must be made
at the time of the loan for repayment within a reasonable period of time
 Reasonable – If it is to buy a house, then 25 years reasonable. If it is to
buy a car, then 5 years is reasonable. Basically, what would the term of
the loan be in an arm’s length transaction
2. short term loans (paid within one year of the end of the tax year of lender)
3. if the loan arises because of the employee’s employment in which case the
principal amount can be excluded form shareholder’s income if they received:
 a loan from employer where the employee is not a specified employee,
where the shareholder owns less than 10% of shares (individually or
together with related people) and deals at arm’s length
 loan from corporation to shareholder (who is also an employee) to assist
them with acquiring
 a home for their occupation,
 previously unissued fully paid shares of the capital stock of the
corporation purchased directly from the corp., or
 a motor vehicle to be used for duties of employment
 For amounts included as income in previous years, taxpayer can deduct repayments of
the loan from their income in the year of payment as long as it’s not a series of loans
 If the loan is not interest bearing at market rate, then there would be an imputed
interest benefit to the shareholder if the principal is repaid. If principal is included in the
s/h’s income, then imputed interest benefit does not apply

 Group plans, RRP contributions, payment of premiums for life and/or Disability
Insurance, Retiring allowance and company car are other forms of remuneration for
Shareholder Managers

Salary vs Dividends:
Basic Trade-off
 Salaries are deductible by corporation but dividends are not; these are subject to
personal tax at lower rates than salaries
 Since federal tax rate on income eligible for SBD is 9%, a provincial corporate tax rate of
4% (13%-9%) on this type of income would provide perfect integration
o Less than 4% would provide a tax savings adv from incorporating income eligible
for SBD and receiving dividends
o More than 4% there is a tax cost disadvantage from incorporating this type of
income
 Salaries can help reduce income to maintain corporate income at or below the $500k
business limit (“bonusing down”) for SBD whereas dividends will not
 On the other hand, dividends reduce the cumulative net investment loss balance, to
help preserve access to the capital gains deduction and may generate a dividend refund
form RDTOH whereas salaries do not
  If the corporation’s income is below the small business deduction limit, perhaps better
for the corporation to pay dividend vs Salary – b/c Integration achieved on income
subject to SBD as discussed previously.
Individual’s Tax Bracket
 If shareholder-manager is in a tax bracket that has a marginal tax rate higher than
corporate tax rate on the income, it may be wiser to freeze salaries/bonuses to take
advantage of the tax deferral in the income left in the corporation due to the time value
of money which can make savings greater now than the added cost at the time in future
o The tax on the dividend is deferred until the dividend is paid
 Any payment of salary or bonus are likely to be taxed at a high personal tax rate of the
shareholder-manager and will eliminate the tax deferral benefit of retaining funds in the
corporation
Tax on Split Income (TOSI)
 Jan 1, 2018 – The provision taxes split income received by a specified individual at the
highest marginal tax rate limiting the ability for owner-manager shareholder of private
corporations to split income with low-income family members
 Calculated separately using the highest marginal tax rate applied to a specified
individual’s split income and added to the individual’s Part 1 tax payable
 Split income subject to TOSI is deductible under Part 1 income of the specified individual
so that it’s not taxed twice
o Only tax credits permitted in computing TOSI are dividend and foreign tax credit
 Income subject to TOSI are not subject to the regular attribution rules
 Specified individual is someone who is a resident in Canada at the end of the year or
immediately prior to their death in a year, if they are under 18, they must have a parent
resident in Canada at any time in the year
 Split Income includes but is not limited to:
o Taxable dividends and shareholder benefits directly from private corp. or
indirectly through a trust/partnership
o Amount from debt obligation of a private corp., partnership or trust
o TCG or profit of the individual from the disposition of shares or debt obligation
 Split income is subject to highest rate unless it meets the definition of “excluded
amount”
 Excluded amounts is divided among age categories
o Less than 18: split income received is always subject to the highest tax rate
unless it is income from property acquired upon the death of a parent or death
of any person while individual was full-time student or eligible for disability
credit
o 18 to 24 years (less restrictive as individuals can be actively involved in business):
income from property acquired upon the death of a parent or death of any
person while individual was full-time student or eligible for disability credit is
excluded and split income received can be exempt from TOSI if it meets this
definition
  Not a related business exception - Income that is NOT derived directly or
indirectly from a related business (business where related person is
actively engaged in the activities on a regular basis / owns >10% of shares
 Excluded business exception – individual engaged actively in business in
taxation year or any prior 5 tax years (works 20 hours a week)
 Safe harbour capital return on property exception (in support of related
business) – uses highest prescribed rate in effect in any quarter of the
year and applied on FMV of property
 Reasonable return of contributions on arm’s length capital exception
(capital excludes: property borrowed from any source; property
transferred to specified individual from a related person (unless on
death); TCG or profit income from the disposition of property from a
related business
o 25 years or older: four possibilities for income to meet excluding amount
definition
 Not a related business exception - Income that is NOT derived directly or
indirectly from a related business (business where related person is
actively engaged in the activities on a regular basis / owns >10% of shares
 Excluded business exception – individual engaged actively in business in
taxation year or any prior 5 tax years (works 20 hours a week)
 Reasonable return of contributions on arm’s length capital exception
 Excluded share exception – income/TCG from the disposition of excluded
shares if shareholder owns 10% or more of the votes and value of the
shares 90% or greater of the corporation income is derived from non-
related business
o Spouse/Common-law spouse 65+: deem income from/TCG/profits from the
disposition of a property as an excluded amount
Other Planning Aspects of using Corporations
Lifetime Capital Gains Exemption
 Individuals are allowed an EXEMPTION from tax up to $866,912 (2019) of cumulative
net taxable capital gain (TCG – ACL) on the disposition of shares of qualifying small
business corporations (QBSC) and $1,000,000 on qualified farm and fishing properties
 Applies to residents of Canada throughout the year AND deems to include (only for this
section) residents of Canada at any time of the year and residents in Canada throughout
the previous or following taxation year
 There is also a CG DEDUCTION allowed which is $433,456 (½ of $866,912) for QSBC
 Calculated as the lease of the three amounts:
o Unused lifetime deduction – $433,456 (½ of $866,912) MINUS all previously
claimed CG deductions adjusted to the appropriate inclusion rate for the year
the limit is being computed
 1990 – Feb 27 2000 = ¾
2
 Feb 28 2000 – Oct 17. 2000 =
3
 After Oct 17 2000 = ½
 o Annual Gains Limit – Lesser of
 net TCG for the year
 the amount of the net TCG that would be determined only including
QBCS dispositioned shares and qualified farm property MINUS
 Net capital losses of other years deducted in the current year, and
 ABIL realized during the year whether they’re claimed or not
(capital losses from disposition of shares and debts of a SBC
o Cumulative Gains Limit – aggregates all the components of the “annual gains
limit for all years” MINUS
 Capital gains deductions claimed in preceding years, w/o an adjustment
for changing inclusion rates, and
 Cumulative net investment loss (CNIL) [excess of investment expenses
over investment income aggregated for all years after 1987
Qualified Small Business Corporation (QSBC) Share
 Three tests to be met to meet the definition of a QSBC share:
o SBC Test – a share of the capital stock of a corp. that is a small business at the
time of disposition is owned by an individual, by their spouse or by partnership
related to the individual
o Holding Period Test – share wasn’t owned by anyone other than the individual or
a person (including personal trust) or partnership related to individual
throughout the 24 month period preceding the disposition
o Basic Asset Test – share was, throughout the 24-period preceding the
disposition, owned by the individual or a person or partnership related to
individual:
 A share of a corporation that was a CCPC
 More than 50% of the FMV of the corp.’s assets were used principally in
an active business carried on primarily in Canada by corp. or related corp.
 A SBC is a CCPC where all (or substantially all) the assets (valued at FMV) are used
principally in an active business carried on primarily in Canada by the corp. or related
corp. (includes assets leased or loaned to related corp.)
 Other provisions related to the capital gains deduction includes:
o The individual must file tax return if TCG was realized or a disposition of capital
property has occurred in the taxation year
o Individual who is a resident in Canada for only part of the taxation year is
deemed to be a Canadian resident throughout entire year if they are a resident
of Canada
o TCG is denied forever if it was not reported on a filed tax return
o Individual can elect to use CG deduction in respect of QBCS when the corp.
becomes public
General Anti-Avoidance Rules (GAAR) Under ITC (S. 245)
Statutory Provision
 Used to prevent abusive tax avoidance transactions or arrangements and seeks to
distinguish between legitimate tax planning and abusive tax avoidance
 “avoidance transaction” is any transaction, by itself or in a series, results in a tax benefit
unless it can be reasonably considered to have a bona fide purpose
 “tax benefit” is a reduction, avoidance or deferral of tax or other amount payable or an
increase in refund of tax
 “Misuse or Abuse” GAAR only applies if the transaction is reasonably considered to
result directly or indirectly in a misuse of the provisions of the Act, the regulations and
tax treaties or an abuse of those provisions read as a whole.