Declared a Bonus but Haven’t Paid It Yet? Here’s What You Need to Know
Businesses often allocate year-end bonuses to shareholders or key employees with plans to pay them in the next fiscal year. This common tax planning strategy lets the corporation claim the deduction in the current year while the individual reports it as income in the following year.
But there’s a catch.
To legally deduct the bonus, you must pay it within 180 days of the fiscal year-end. Miss this window, and you risk the CRA denying the deduction—potentially leading to a higher corporate tax bill and interest charges.
The 180-Day Rule Explained
According to Section 78(4) of Canada’s Income Tax Act, any accrued bonus must be fully paid out within 180 days after your company’s fiscal year-end in order to qualify as a deductible expense.
Example:
If your company’s year-end is December 31, 2024, and you’ve accrued a $250,000 bonus, it must be paid by June 29, 2025. Failing to do so means the CRA may add that bonus back into your 2024 income, increasing your taxable earnings.
What Counts as “Paid”?
This is where it gets murky. The CRA has suggested that making source deductions (like CPP, EI, and tax withholdings) might count as payment. But here’s the problem:
Some CRA auditors insist that the source deductions must be remitted within the same 180-day period, not just by the usual payroll due date (e.g., the 15th of the next month).
This gray area creates compliance risks if you're not extra cautious.
Best Practices to Stay Safe
✔️ Track Your Dates
Use reminders or your accounting software to keep tabs on when that 180-day deadline hits.
✔️ Pay the Full Bonus
Issue the bonus through direct deposit or cheque before the cut-off date.
✔️ Remit Withholdings Promptly
To be on the safe side, remit deductions within the same 180-day period—even if your usual schedule allows later.
✔️ Talk to a Professional
Cash flow tight? Unsure what counts as “paid”? A CPA can help ensure you stay compliant and optimize your tax position.
Closing Thoughts
Late bonus payments can undo your hard-earned tax planning. Keep things simple: pay bonuses within 180 days and remit all deductions promptly. Planning ahead can save your business from costly CRA reassessments and interest.
Need support in managing your corporate payroll and deductions? Contact us —we’re here to help.
Tax Preparation Services Near You (Not Limited to These Areas):
I regularly work with clients in the locations below, but my services are available to many more regions as well.
