Salaries and bonuses to shareholders

One of the basic principles of taxation is that expenses must be “reasonable” to be deductible. The CRA has had a long-standing administrative position on the reasonableness of salaries and bonuses paid to owner-managers. In general, the CRA won’t question the reasonableness of salaries or bonuses paid to principal shareholder-managers of a corporation if the company has a practice of distributing its profits to its shareholder-managers in the form of bonuses. However, this administrative position applies only to shareholders who are Canadian residents actively involved in the day-to-day operations of the company, thus contributing to the income-producing activities from which the remuneration is paid.