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. The small business tax rate limit, for example.
Management bonuses must be paid within 179 days from your year end date and their relevant payroll remittances paid accordingly. If bonus and payroll deductions are not paid within this time frame, Canada Revenue Agency (CRA) can reassess the return in which the bonus was recorded and deny the deduction, resulting in taxes, penalties and interest.
For example, if you have a March year end date and you declare a management bonus, the bonus must be paid by September of the same calendar year. The result is an extra salary expense in that corporate year end and so you 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.
However, if the corporation has a July or later year end, it would not have to pay the bonus until the following calendar year. Thus the corporation would have deferred the personal taxes into the next year. So, for example, a corporation with a July 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 January 26, 2017, pushing the personal taxes into 2017. The corporation has also deferred paying the payroll taxes for 6 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 slip to ensure that all bonuses are paid out on time and captured on the annual T4 slip.