Recently, Canada Revenue Agency (CRA) was asked whether a shareholder/manager bonus could be considered to be reasonable if it created a non-capital loss that was carried back to the three previous taxation years to reduce the income in those years to the small business deduction limit. The bonus rewards the shareholder/manager for contributing to the successful management of the company and creates the non-capital loss carryback that reduces the corporation’s income from an active business to the small business deduction limit.
CRA acknowledged that the proposed payment is within the scope of the CRA policy on “reasonableness of shareholder/manager remuneration”. The company is a Canadian controlled private corporation (CCPC) paying a bonus to the active shareholder/manager, who is resident in Canada, to reduce the CCPC’s taxable income to the small business deduction limit for the carryback period. The corporation had passed a Director’s Resolution that stated a policy of declaring annual bonuses to specific Canadian residents, who are active in the management of the corporation, to reduce the income of the business to the small business limit.