Restrictions on the deduction of excessive salary or retirement allowances paid to an officer

The tax deduction for salary and retirement allowance paid to an officer of a company is disallowed when the amount of salary or retirement allowance is excessive. The reasoning behind this is that excessive salary or retirement allowance paid to an officer is construed as hidden distributions of profits rather than business expenses. The tax authority is generally not aggressive in determining whether salary or retirement allowance paid to an officer is excessive. Where the amount of salary or retirement al lowance paid to an officer is significantly excessive with reference to services provided the officer, the tax authorities may challenge the deductibility.

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