Income Tax Act s. 248(1): Definition of Specified Employee

A “specified employee” is an employee who is a specified shareholder (broadly, a 10%-or-greater shareholder of any class, with non-arm’s-length holdings counted) or who does not deal at arm’s length with the employer. The Act restricts how much of a specified employee’s remuneration can enter an SR&ED claim, including limits on bonuses and on the salary base used for the proxy amount. Owner-managers of claimant companies are almost always specified employees, so these limits come up in most private-company claims.

Text of the Provision

248(1) “specified employee” of a person means an employee of the person who is a specified shareholder of the person or who does not deal at arm’s length with the person;

… [intervening definitions omitted here but appear in the PDF] …

“specified shareholder” of a corporation in a taxation year means a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation and, for the purposes of this definition,

(a) a taxpayer shall be deemed to own each share of the capital stock of a corporation owned at that time by a person with whom the taxpayer does not deal at arm’s length,

(b) each beneficiary of a trust shall be deemed to own that proportion of all such shares owned by the trust at that time that the fair market value at that time of the beneficial interest of the beneficiary in the trust is of the fair market value at that time of all beneficial interests in the trust,

(c) each member of a partnership shall be deemed to own that proportion of all the shares of any class of the capital stock of a corporation that are property of the partnership at that time that the fair market value at that time of the member’s interest in the partnership is of the fair market value at that time of the interests of all members in the partnership,

(d) an individual who performs services on behalf of a corporation that would be carrying on a personal services business if the individual or any person related to the individual were at that time a specified shareholder of the corporation shall be deemed to be a specified shareholder of the corporation at that time if the individual, or any person or partnership with whom the individual does not deal at arm’s length, is, or by virtue of any arrangement may become, entitled, directly or indirectly, to not less than 10% of the assets or the shares of any class of the capital stock of the corporation or any corporation related thereto, and

(e) notwithstanding paragraph (b), where a beneficiary’s share of the income or capital of the trust depends on the exercise by any person of, or the failure by any person to exercise, any discretionary power, the beneficiary shall be deemed to own each share of … [excerpt ends at page break in the source PDF]

Source: Income Tax Act (Canada), subsection 248(1), definitions “specified employee” and “specified shareholder”, as consolidated July 27, 2011. Archived excerpt; subsequent amendments are not reflected. For the current text see the Income Tax Act at Justice Laws.