What are the tax implications of declaring a management bonus at year end?
If your corporation has had a profitable year and your corporate year end is July or later in the calendar year, you may wish to declare a management bonus to defer some of the taxes to the next year, or to reduce income to a level of corporate tax you are comfortable with; for example to the small business tax rate limit.
Management bonuses must be paid within 179 days from your year end date and their relevant payroll remittances paid accordingly, or CRA can reassess the return in which the bonus was recorded, denying the deduction, resulting in taxes, penalties and interest.
If you have a March year end date and you declare a management bonus, the bonus must be paid in September of the same calendar year. The result is that you get the extra salary expense in that corporate year end so will pay less corporate taxes, but you must claim the salary as personal income in that same calendar year and pay the personal income taxes. So there is no deferral of taxes.
If the corporation has a July or later year end, you would not have to pay the bonus until the following calendar year. Thus you would have deferred the personal taxes into the next year. So for example, a corporation with an August 2012 year end declares a bonus of $100,000. As this is a deductible expense, a BC corporation (CCPC) would be saving tax at 13.5% or $13,500. The bonus is actually paid on February 26, 2013, pushing the personal taxes into 2013. You have deferred paying the taxes for 5 months.
It is best to keep a reconciliation of what was declared as a bonus by the corporation each year as compared to what was reported on the T4’s to ensure that all bonuses are paid out on time and captured on the T4.
For more information on management bonuses as a tax deferral method, please contact us.Download a copy of this issue