Year-end Bonus

It’s always nice to see the end of a year coming up knowing that with as hard as you worked, there will be some downtime in the Christmas season.

But here at VR the later part of the year makes us think of one of our favourite tax planning strategies, using a bonus to defer income to a different period!

As a bit of background, although most clients are aware of this already, an owner of a corporation can compensate themselves in several ways. Salaries and dividends or a mix of the two are the most commonly used options.  

A salary is taxed at a higher rate personally but allows for a deduction in your corporation. Whereas the dividend is taxed at a lower personal rate but does not allow for a deduction in the corporation.

There are multiple reasons considered when we work with our clients to determine what mix of dividends and/or salary makes sense for them. But when you have a corporate year-end in the last six months of a calendar year, the salary option opens up an additional tax planning avenue.

Let’s use an example of a corporation with a September 30 fiscal year-end. If the corporation declares a bonus payable at September 30, this will be reported as a deduction in the September 30 year-end. BUT, in order to keep this deduction, the corporation MUST actually pay the bonus within 179 days of September 30. Failing to pay the bonus in this timeframe could result in a reassessment of the corporate tax return.

The individual shareholder receiving the bonus will not include it in their income until the funds are received. Meaning that if the corporation declared a bonus at its’ September 30, 2024 year end, and paid it to the shareholder on February 28, 2025, the source deductions would not be remitted to CRA until that time.

The bonus would be reported on a T4 in 2025 and included in the individual’s income in 2025, with any tax owing by April 30, 2026.

Effectively what has happened here is that you have a corporate expense in 2024 but personal income in 2025. You have deferred out the income reporting, allowing for planning related to cash flows and personal income levels.

This can be an especially effective strategy when a corporation has had an excellent year and it is not likely to be repeated.

This strategy requires careful planning and execution to be completed accurately and allow for the desired benefit. Timing is everything. Give the VR team a call if you wish to discuss how this might be helpful in your situation.

The above material is current as of October 30, 2024.

The information presented is a general overview and not intended to cover specific situations. You should consult with your professional advisors directly before taking any action.

Vertefeuille Rempel Chartered Professional Accountants LLP, its partners, employees and agents do not accept or assume any liability by anyone relying on the information presented.