What happens if you declare a bonus on your taxes but don't pay it?

Pay Bonuses on Time to Avoid Tax Headaches

Many private corporations accrue year-end bonuses for shareholder-employees, planning to pay them in the following fiscal year. This allows the corporation to deduct the bonus in the accrual year while the employee reports the income in the following year.

However, for the deduction to be allowed, the bonus must be paid within 180 days of the company’s fiscal year-end. If you miss the deadline, you could face an unwanted tax bill and CRA scrutiny.

Understanding the 180-Day Rule

The Income Tax Act (ITA) Section 78(4) states that for a corporation to claim a deduction for an accrued bonus, it must be paid within 180 days of year-end.

For example:

• Jimmy's company has a December 31, 2014, year-end.
• A $250,000 bonus is recorded in the books, but not yet paid.
• The company deducts the bonus and pays tax on $500,000 instead of $750,000 in 2014.
• The bonus must be paid by June 29, 2025 for the deduction to be valid.

If the deadline is missed, the CRA will add the bonus back to the corporation’s income for the 2024 year, increasing taxable income and resulting in potential interest charges.

What Counts as "Payment"?

The CRA has clarified that paying source deductions on time may be enough to count as payment. However, there’s uncertainty on whether this means:

1. The payroll remittance must be made within the 180-day deadline
2. Or if it can follow the regular remittance schedule (e.g., 15th of the following month for regular remitters)

During audits, some CRA officers have argued that withholdings must be remitted within the 180-day timeframe, creating additional risks for corporations.

Best Practices to Avoid Penalties

✅ Monitor Deadlines Closely – Set reminders for the 180-day rule.
✅ Pay the Bonus in Full – Issue payment via cheque or bank transfer before the deadline.
✅ Remit Source Deductions on Time – To be safe, remit withholdings within 180 days, not just by the next payroll deadline.
✅ Consult a Tax Professional – If cash flow is tight or you're unsure, get professional guidance.

Final Thoughts

Paying bonuses late can trigger tax adjustments and interest charges. To keep your corporate deductions intact, ensure bonuses are fully paid within 180 days, and remit source deductions on time. A little planning now can prevent big headaches later.

For more information, consult Canada.ca and if you’re looking for a CPA in Ottawa, please don’t hesitate to reach out.

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This is not legally binding tax advice. This is educational analysis. Say hello if you need help.

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