Chapter 3: Deferral of Income and Bonuses Flashcards
How does deferral of income work in tax planning?
Employers may defer payments (such as bonuses) to the next tax year, allowing the business to claim an expense immediately while delaying the employee’s tax liability until the income is actually received.
What is an example of deferring income for tax purposes?
A business declares a bonus to an employee in December 2023 but stipulates it will not be paid until January 2024.
The business claims the bonus as an expense in 2023, but the employee does not report the income until 2024.
What does ITA 78(4) say about the deferral of unpaid remuneration?
ITA 78(4) allows deferral of unpaid remuneration (such as bonuses) as long as it is paid before the 180th day of the employer’s tax year-end.
If not paid by the 179th day, the employer loses the ability to deduct it in the earlier tax year and can only deduct it in the year it is paid.
What happens if an unpaid bonus is not paid within the 179-day limit?
If an unpaid bonus is not paid within the 179-day limit, the employer cannot deduct the bonus in the earlier year and must instead deduct it in the year in which the bonus is actually paid.
How does a salary deferral arrangement (SDA) differ from a standard bonus deferral?
An SDA involves deferring remuneration for services beyond three years after the services were rendered. The employee must include the deferred amount in income for the year the services were rendered, and the employer deducts the same amount.
What is the income tax consequence for a “standard bonus”?
The employer deducts the bonus when accrued, and the employee includes the bonus in income when it is received, provided the bonus is paid within 179 days after the end of the employer’s taxation year.
What are the income tax consequences for a bonus paid more than 179 days after the employer’s tax year-end?
If the bonus is paid more than 179 days but less than three years after the end of the tax year, the employer deducts the bonus when it is paid, and the employee includes the bonus in income when received.
What are the tax consequences for a bonus under a salary deferral arrangement (SDA)?
For an SDA, the employer deducts the bonus when it is accrued, and the employee includes it in income in the year the services were rendered, even if the payment is deferred for more than three years.
What happens to an employer’s deduction if a bonus is not paid within 179 days of the tax year-end?
The employer cannot deduct the bonus in the earlier year but must deduct it in the year it is actually paid.
