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Defer Taxes With A Salary Bonus
If the corporation’s year-end occurs after July 6, it can accrue a bonus to the active shareholder as of its year-end, and pay the bonus after December 31. Bonuses must be paid within 180 days of year-end to be deductible in the year.
The corporation can thus get a deduction from its income in the current year, but you do not have to recognize the income personally for tax purposes until the subsequent year. In effect, you will pay personal tax on the bonus by April 30 of the year following when the bonus was accrued.
You can continue to accrue and pay the bonus indefinitely until the corporation ceases activity. This can result in an indefinite deferral of tax on the bonus if you draw a normal salary each year.
Click HERE for more discussion of the tax efficiencies on Bonusing Down.
Note that CRA is always concerned with the reasonability of amounts paid out of a corporation for salaries. CRA has a policy that salaries paid to active shareholders and managers in the daily operations of a Canadian-controlled Private Corporation would not be subject to the reasonability assessment. However, CRA does not extend this policy to non-active shareholders or managers, nor to shareholders or managers that are not active in daily operations, nor to corporations that are not Canadian-controlled Private Corporations. CRA has also noted that they do not extend this policy to remuneration paid from a source of income that is not generated from normal, ongoing business operations. For example, income generated from a major sale of business assets is not considered earned during the normal course of operations. This is not to say that CRA will deny the reasonability of the remuneration in this case. Merely they reserve the right to review the reasonableness of the amount. Click HERE for more discussion on this.
Caution is warranted and proper planning with your chartered accountant is essential. Contact Keith Anderson CA at (780) 447-5830 if you need advice.
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