The Canada Revenue
Agency (“CRA”) allows a corporation to write off a management or
shareholder bonus payable in the year of the accrual, provided
it is paid out within 179 days from the corporate year-end.
If the bonus if not paid out within 179 days, the accrual is
denied and the CRA will add the bonus back to corporate income.
The bonus would then only be tax deductible during the fiscal
year in which it was paid.
If a corporation’s year-end falls within 179 days of the
calendar year, a bonus payable may provide for a tax deferral.
For example, let us assume a Company has a corporate year-end of
September 30, 2006 and currently has a profit of $100,000. The
shareholders of the Company would like to wipe out any profit to
avoid corporate tax. Therefore, the shareholders can issue a
management bonus payable of $100,000. This will reduce corporate
taxable income to zero and result in a ‘payable’ in the amount
of $100,000. This is a tax deduction to the corporation on its
September 30, 2006 tax return.
If the bonus is paid out 179 days following September 30, 2006,
we have a date of March 26, 2007. Therefore, the corporation has
received a tax deduction in one year and the recipient
(shareholder or manager) receives the bonus and is taxed on it
the following year. This provides for a tax deferral.
Of course, the requirement for corporations to withhold and
remit tax on the bonus drastically reduces the benefit of using
this deferral method.
For more information on management bonuses and year-end tax
planning please give us a call.
NOTE: The Shannon
& Company 'Tips' are NOT intended to cover all tax issues. You
should talk to your Shannon & Company professional before making
any decisions regarding the information found here.