Things Necessary to Know When Allocating Management Bonuses

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In today’s competitive world of business, management needs to be kept motivated in the very same respect as the staff themselves do. Thus, the distribution of management bonuses is an excellent away to keep efforts focused while simultaneously rewarding employees for a job well done. Also, a company that boasts shareholders is extremely attractive to outside investors. This will perhaps lead to a further amount of capital being enjoyed to promote current and future operations. Still, there are a few important factors that need to be considered. Not only must the business match the definition of what is known as a Canadian-Controlled Private Corporation, but other tax issues are present. Let us have a quick look at these concerns in a bit more detail.

Meeting the Requirements of a Canadian-Controlled Private Corporation
First, there are several metrics that define a business as a Canadian-Controlled Private Corporation (CCPC). A company needs to be private (as the name denotes), it was incorporated after June 18, 1971. A Non-resident does not have control over the company and it is not controlled by a public corporation. For a more comprehensive list and to understand how these and other variables may affect the allocation of management bonuses, it is best to speak with a business attorney.

Management Requirements
As mentioned previously, the managers (these are also the shareholders) are required to be Canadian residents. Furthermore, these individuals need to be active members of the company that are directly involved with daily operations (silent partners may not qualify for this role) that allow the company to gain income. This is in direct contrast to what are known as “inactive” members. However, we will have a bit of a closer look at this term a bit later on.

Other Concerns to Address
There may be times when the current shares of an organization are held by a holding company. In this instance, the Canada Revenue Agency (CRA) observes that they will not question any payments made, but only under the stipulation that bonuses and salaries are paid out to managers that are actual shareholders. These shareholders can either hold physical copies of shares or instead these shares may be kept with a third-party holding company.

Other concerns may arise if bonuses are given to those shareholders of a company that are considered “inactive”. The main problem lies within the nomenclature of the term “inactive”, for it has been rather poorly defined by the CRA. Due to the fact that the agency has neither commented nor elaborated on the definition of “inactive”, care must be taken here.

The process regarding the distribution of management bonuses may appear to be quite lucid and straightforward. However, problems can still arise. Should there be any questions about these payments or if there are queries regarding the supposed definition of an “inactive” shareholder, it is best to contact a duly registered financial adviser for further details.

Eric La CaraEric La CaraManaging Partner and Tax Practice manager for Capital Tax in Vancouver and Tokyo. Eric is a U.S. and Japan Personal & Corporate tax specialist with more than 15 years of experience in the area of cross-border structuring and taxation. Eric is charged with developing Capital Tax overall operations and strategic direction using the business and technical skills he has acquired during his professional career in Asia.