Shareholder-Manager Remuneration and Tax Planning for the Owner-

Manager

Employment Remuneration
- Salaries and Bonuses
- Must be reasonable
- If paid to arm’s length employee, any amount is reasonable
- If paid to controlling shareholder-manager, ‘reasonable’ will be more
closely assessed because of the conflict of interest
- Deductibility criteria from CRA:
- Reasonableness of the bonus in relation to profit and services rendered
- Pmt for real and identifiable service
- Justification for expecting a bonus over regular salary
- Reasonableness of the time b/w determining profit and establishing the
bonus
- Legal obligation to pay the accrued bonus

- Accrued Bonuses and Other Amounts

- Unpaid Remuneration
- Must be paid within 180 days after year-end
- Must be a liability to pay (not contingent)

- Non-arm’s length Accruals Other than Remuneration

- Deductible expense owed by a corporation to non-arm’s length person
[ 78(1)]
- Expense, such as royalties can be accrued as an expense in one year
and paid up to two years after the taxation year the amount was accrued
- If unpaid at the end of the second taxation year:
- Add the unpaid amt to corporations income in the third taxation
year, (results in double taxation bc income to the shareholder and
the corporation would not get a deduction) or
- File an agreement to deem the amount paid to the person on the
first day of the third taxation year and loaned back to the company
- There is a late fee if the agreement is not filed on time,
25% of the royalties would be added back to the
corporation’s current taxation year

- Shareholder Benefits [15(1)]

- Benefits conferred on shareholder must be included in their property income
- Bc its treated as a distribution of surplus of the corporation
- At the corporate level, they are treated the same as dividends
- Benefits do not include:
- Paid-up capital (PUC) reduction, redemption, cancellation, or acquisition
by the corporation of its shares
 - Dividend or stock dividend
- Conferring on all owners of common shares an identical right to acquire
common shares
- A conversion of contributed surplus under par. 81(1)(c.3)

- Shareholder Loans and Indebtedness [ 15(2) ]

- Designed to prevent the deferral of tax by taking a loan from the company
- Under the shareholder loan provisions, loan received by a corporate shareholder
is not taxable
- General Rule: included in income of the borrower for the year in which loan was
made
- Exceptions: under ssec. 15(2.4) (excluded from shareholder’s income if)
- If the loan is repaid within one year after the taxation year the loan was
taken, then it wont be added to income, otherwise, it will be included in
income in the year the loan was received
- Loan made to a shareholder who is also an employee but not a specified
employee
- Loan made by corporation to a shareholder who is also an employee to
assist him/her to acquire a home for his/her occupation
- Loan made by the corporation to a shareholder who is also an employee
to assist him/her to acquire previously unissued shares
- A loan made by the corporation to a shareholder who is also an employee
to assist him/her to acquire a motor vehicle used in employment
- Bona fida arrangements were made for repayment within a reasonable
time
- Bona fida transaction is when shareholder deals with the
corporation in the same manner as a customer or supplier
- Other exceptions:
- Ssec. 15(2.2) - loans b/w non-resident persons
- Ssec. 15(2.3) - debt arising in the ordinary course of business, as long as
bona fide arrangements are made at the time of the loan

- Deduction of Repayment
- If amt has been included in income for a preceding year, taxpayer can
deduct any repayment of the loan from their income in the year of
repayment

- Imputed Interest Benefit (sec. 80.4)

- May apply if principal amt of loan is not included in income (meets above
criteria)
- Amt of interest on low-interest or interest-free loan included in income for
any person who received a loan by virtue of:
- Employment (home purchase or home relocation loans)
- Shareholdings, or
 -Shareholdings of a person who does not deal at arm’s length with
shareholder
- Pg.787 diagram

- Other Planning Considerations

- Income splitting through Salary Pmts
- Pmts will split the income of the business if that it is subject to tax at lower
personal tax rates, but possible loss of a marital status tax credit for the
spouse
- Employment benefits
- Contributions to group plans, RPP
- Shareholder can get some benefits like the group term life
insurance but not the income from an office or employment related
to the premiums paid by the corporation for private health
insurance and group sickness
- Pmt of Premiums for life and/or disability insurance
- Life insurance would only be shareholders benefit if its an
individual policy and the company pays the premiums
- If the company is the policyholder, upon the shareholder’s death
the company would receive the proceeds, not resulting in a
shareholder benefit
- Retiring allowance
- Retiring allowance paid by the company would receive a tax
deduction and can be deferred by the shareholder-manager by
rolling allowance into an RRSP
- Company car

- Considerations in Choosing Elements of Shareholder-Manager Remuneration

- Cash needs of shareholder-manager
- Cash needs of the business
- Tax rate of the corporation
- Personal tax rate of the shareholder-manager
- Personal preferences of the shareholder-manager (RRSP and CPP
contributions)

Salary vs. Dividends

- Trade-off:
- Salaries are deductible by the corporation but subject to personal tax
- Dividends not deductible by the corporation but personal tax reduced by the
dividend tax credit

- Considerations:
- Corporate tax rate
- Personal tax rate
 - Applicable rate of gross-up and dividend tax credit
- Amt of shareholder’s personal tax credits and deductions
- Shareholder’s participation in CPP, RPP, and RRSPs which require salary not
dividend

- Determine Tax Savings or Cost

- Compare
- Total of personal and corporate tax paid when the specified salary/bonus
is paid to the individual, to
- Total of personal and corporate tax paid when the specified salary/bonus
is left in the corporation to be taxed and the after-tax cash is paid as a
dividend to the individual
- A “savings” is realized by paying a dividend if the individual has more after-tax
personal cash when the income is flowed through the corporation and paid as a
dividend compared to paying a salary/bonus
- A savings if the income of the individual generate more after-tax cash
than a dividend paid to the shareholder would
- A “savings” is realized by paying a salary/bonus if the opposite is true.

- Determine tax deferral or prepayment

- Compare
- Total of personal tax paid when the specified salary/bonus is received by
the individual, to
- Corporate tax paid when the specified salary/bonus is left in the
corporation to be taxed and not paid as a dividend to the individual
- A “deferral” is realized if the tax on the salary/bonus is greater than the tax in the
corporation
- A “prepayment” is realized if the tax on the salary/bonus is less than the tax in
the corporation
- You (corporation) are prepaying the amount of tax on the dividend you
would pay out to the shareholder

Tax on Split Income (not as important complete later, pg 810-820)

Other Planning Aspects of Using Corporations

Holding Companies (holding company b/w shareholder and another company)

- Extension of integration
- Have more control over the amt of dividends you have and when you want to pay
them out
- Possible tax for private corporations on dividends received under Part IV
- This tax is refundable when the corporation pays a taxable dividends
 - Compensation
- can pay yourself a salary or dividend
- If 2 shareholder-managers own a company and they have separate ideas of how
to obtain their dividend/salary (one wants to defer and the other wants the cash)
- They can each create holding companies (pg822) that they own 100%,
and that controls their value of ownership of the operating company
- The holding company gets paid the dividend amt and then they get to
decide when they want to take the dividend out

- Deferral of tax on dividends

- If the operating company is paying out to much of dividends then the
shareholder-manager would want to transfer shares to a holding company (that is
connected to the operating company)
- Therefore they can transfer the dividends there and defer tax until they want to
take the dividends out

- Management fees
- To holding company should be well documented to provide evidence of
reasonableness

- Estate planning
- When do shares for this company be eligible for capital gains deduction
- To avoid further capital gains on shares in an operating company upon
shareholders death
- Transfer shares to a holding company, so upon death the holding
company can be owned by the next generation in the family

Lifetime Capital Gains Exemption

- Allows individual to shelter from tax up to
- $866,912 (2019) of CG on the disposition of QSBC shares CG
- $1,000,000 CG on the disposition of farm and fishing property

Qualified Small Business Corporation (QSBC) shares [ 110.6 (1) ]

- Shares that at any time meet the following tests
- Small business Corporation (SBC) test
- At the time of disposition is
- Owned by: individual, individual’s spouse, or a partnership related
to the individual
- Must be an SBC
- SBC is a corporation which was at any particular time:
- A CCPC
- All or substantially all (90%) of FMV of assets
(including goodwill) were:
 - Used principally in the active business
carried on primarily (>50%) in Canada;
- Shares or debt of a SBC that was
connected; or
- A combination of the above points
- Holding Period test
- Throughout the 24 months preceding the determination time
- It was owned by no one other than the individual or a person or
partnership related to the individual
- The Basic Asset Test (50% test)
- While passing the holding period test, throughout those 24 months period
- Shares of a CCPC for which > 50% of the FMV of its assets were
used principally in an active business carried on primarily in
Canada by the corporation or by a related corporation

- Modification of the Basic Asset Test (stacking rule)

- Where a parent does not meet the 50% test on its own active business assets
- But has a subsidiary that is connected
- Then, throughout 24 months ending at the determination time:
- Both parent and connected subsidiary must each meet the 50% test with
a combination of their own active business assets and shares and debt of
the connected corporation
- One of either the parent or the connected subsidiary must meet the 90%
test with a combination of its own active business assets and shares and
debt of a connected corporation

- Stating the conclusions on the application of these tests:

- Where more than 50% of the assets of a corporation are active business
assets, the Basic Asset test is met and the assets held by the connected
corporation is irrelevant
- It is only when the 50% Asset test is not met by the given corporation that
you consider the Modified Asset Test
- If modification test is used, then one corporation (either parent or
connected) must meet the 90% test and the other must meet the 50%
- Computation of the CG Deductions
- Calculated as the least of:
1) Unused lifetime deduction - $433,456 (½ of $866,912) minus all
previously claimed capital gains deductions
2) Annual gains Limit - net taxable capital gain (TCG) for the year less net
capital losses deducted and ABILs (for the year whether or not they were
claimed)
3) Cumulative Gains Limit - cumulative “annual gains limit” less:
- Cumulative capital gains deductions claimed, and
- Cumulative Net Investment Loss

- Cumulative Net Investment Loss (CNIL)

- Purpose is to remove the perceived double benefit of CG offset by capital gains
deduction and non-capital sources of income offset by excess investment
expenses at the same time

= Investment Expenses - Investment income

- Investment Expenses include:

- Property expenses (interest, carrying charges)
- Certain specific expenses deducted from a partnership where taxpayer is
a “specified member”
- Losses from a partnership where taxpayer is a “specified partner” and
limited partnership loss carryovers deducted in year
- Losses from all properties
- Net capital losses carried over and deducted but not eligible for capital
gains deduction
 - Investment Income
- Income from all property
- Income from a partnership of which taxpayer is a “specified member”
- Rental property income
- Net TCG not eligible for CGD

- Attribution Through a Corporation

- Condition:
- If one of the main purposes of the transfer or loan may reasonably be
considered to reduce the income of the transferor and to benefit a
designated person (the transferor’s spouse or minor not at arm’s length or
is the niece or nephew of individual)
- Result:
- Transferor deemed to receive as interest of:

Outstanding amount x prescribed rate

Less:
- Interest received by the transferor
- All grossed-up taxable dividend received by transferor on shares
received as consideration for transfer
- Dividends received by designated person

- Exceptions:
- Designated person is not a specified shareholder of the corporation
- Corporation is an SBC

- GAAR
- Purpose: to deny tax benefits that result from an avoidance transactions

- Avoidance transaction: any transaction that by itself or as part of a series of

transactions results in a tax benefit

- Tax benefit: a reduction, avoidance, or deferral of tax or other amounts payable

under the Act, or increase in a refund of tax or other amounts under the Act

- Requirement for Reporting on Tax Avoidance Transactions

- Requires taxpayers to report aggressive tax avoidance transaction to
CRA when:
- The transaction is classified as an “avoidance transaction: under
GAAR; and
- 2 of the 3 hallmarks exist as follows:
- Promoter or tax advisor fees are based on tax savings
- Promoter or tax advisor requires “confidential protection”
 - The taxpayer obtains “contractual protection” in respect of
the transaction
- A penalty for failure to report is imposed