Year-end management bonus – tax deferral for the shareholder

Companies may claim a tax deduction for unpaid management fees or salary at year-end, provided that the fees are paid to the manager or shareholder within 179 days of the year-end date.

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, if a company has a corporate year-end of Dec 31, 2012 and a profit of $100,000, the shareholders can issue a management bonus of $100,000 to reduce corporate taxable income to zero on its 2013 tax return.

If the bonus is paid out 179 days following Dec 31, 2012, i.e. June 25, 2009, 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 for the shareholder, but not for the corporation.

If the bonus if not paid out within 179 days, the accrual is denied and the Canada Revenue Agency (CRA) will include the bonus as part of the company’s corporate income. The bonus would then only be tax deductible when it is paid in the following fiscal year.

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