The owner, who is also an employee of the company, told us that he would like to receive a bonus of 50% of the company’s income upon closing in December 2022. However, the financial statements were not finalized until January 20th, 2023. Upon finalization, the bonus amount was estimated to be $50,000 and was charged to the owner’s account on January 27th, 2023. The payroll deductions for this bonus, along with regular salary deductions for January 2023, will be paid to the CRA on February 15th, 2023.
With this in mind, we have a couple of questions:
Should we issue a 2022 T4 and add the bonus on February 28th, 2023 to the owner/manager?
Are there any potential issues that may arise with CRA as we are reporting the bonus as a cost for the company’s year-end of December 31st, 2022 while the employee is reporting it as salary income for the same year and we did not pay deductions by 15 Jan 2023?
Since the paper trail shows the bonus being recorded in 2023 and the deductions also paid in 2023, I’d say it belongs on a 2023 T4. The company can accrue a bonus payable at Dec 31, and it’s deductible in 2022 as long as it’s paid or credited to shareholder within 180 days, which is near the end of June. If he tries saying it should be on a 2022 T4, then the deductions are late and subject to an automatic penalty. If he wants to go this route, then the 2023 journal entry has to be reversed and reposted in 2022. Kind of late to do this now. He should have thought this out way before now. Kind of like closing the barn door after the horse is out. And this is all done to artificially bump up his 2022 income to qualify for a mortgage? How close is this to an actual fraud? And, do you want to be implicated, too?
If you booked the bonus expense to the owners shareholder account on Jan 27/2023, this is a 2023 transaction, unless you booked an accrual for the bonus expense in 2022 y/end. If you want to book it as T4 income for 2022 then CPP withholdings at minimum ($5300.00) were due Jan 15, 2023. Any payment there after will be considered late and penalties and charges will be levied by CRA.
The mortgage broker if well experienced should understand that it is tax efficient for owner/shareholders bonuses or regular remuneration to be reported as a dividend (T5) vs salary (T4). I have never had any issues with lenders (banks or others) looking at mortgage application which show dividends as the main income source.
Starting to see this more now, though. Lenders prefer to see employment earnings (which is generally a reliable monthly amount) rather than dividends (which are a return on investment, and thus subject to the company having sufficient income, and the directors decision to declare them).
I agree with @jhd.hemeon - the usual reason to declare a year-end bonus is so that the company can deduct the amount for tax purposes without having to pay it out for several months. When the payment actually happens, that’s when it becomes “employment income” to the recipient, and source deductions need to be withheld/remitted.
Given your explanation:
the shareholder/employee would have to go back in time and make a decision to be paid a salary (monthly/weekly/etc) throughout the year 2022 in order to legitimately issue a T4 for 2022 which the mortgage lender could rely on as a true salary. In the eyes of the lender, a year-end bonus would be just as irregular and unreliable as dividends.
The current economic climate and default exposure mortgage companies have on their books at moment has certainly caused them to really tighten their lending criteria. Despite these changes, my experience with an owner operated corporation where the owner’s total remuneration is salary or dividend or a mix of both has been accepted without issue. The lender would ask for the company financial statements and or period bank statements as secondary verification.
Dividends received from your own company is much different than dividends from a publicly traded company whose dividend payout is not within the control of the shareholder.
As the interest changes work there way through the system, it will be very interesting to see the impact it will have on real estate going forward. In certain pockets of the GTA, there are quite a few folks who are underwater already. To avoid the widespread market panic, the lenders have applied their payments to interest only with nothing going to principal. This will only last for as long as the property value doesn’t decline any further.
Exactly - if you are a salaried employee, the lender doesn’t ask for more than the T4 and/or pay stubs. But, if they know that the borrower’s income stems from their own company, the lender will base their decision (and interest rate) on the COMPANY financials, which increases the lender’s risk, particularly if the company has less than 3 years of history.
In my experience, salaried employees with $50,000 of annual income get approved for a larger amount, at better rates, than a shareholder with $100,000 of annual dividends from their own company.
Asssuming the Director’s intention WAS to pay a Management Bonus as at 31/12/22:
Write a Minute EFFECTIVE prior to that date evidencing the intention without speficying an amount, with the amount to be determined later; for the legally inclined, this is NOT “backdating” as the intention was in place at the time…it is simply papering the intention
accrue the bonus at 31/12/22; charge to A/P and Management Salaries
Pay the Bonus in 2023 – T4s and ALL PAYROLL is determined by the date of payment, not the period that it is paid for, clearing the accrual
This is a pretty normal year end transaction in small businesses. I have yet to see CRA ever challenge one, unless it isn’t actually paid, or if the amount is not reasonable.
The dividend vs salary issue is a different one entirely.
Edit/addition: the bonus accrued MUST be paid within 180 days. And yes, they count them.
Kind of…but it needs to go via the shareholder and THEN to the RRSP. Cannot avoid CPP (unless elected and over age) or EI (if under ownership %). Tax withholding is NOT mandatory, but if withheld, MUST be paid – the payment is mandatory, the withholding is not.
So: gross amt - CPP - EI = net amount to shareholder, pay and forward to RRSP. Basically no tax on the transaction in the year paid.
@SmallBizGuy thanks for your response. Why does it have to go to the shareholder first? Can’t the corporation transfer directly into the shareholder’s/ employee’s RRSP account?
Audit trail in short. While the company can pay directly to an employee (any employee), it would want to require a “Direction to Pay”…because, notwithstanding that everyone understands what’s going on…the requirement of a bonus payable being paid later is that it is PAID within 180 days (not just “journalled”) and it is paid TO the employee.
A payment directly to an RRSP doesn’t satisfy either of those from a legal perspective.
Paperwork ALWAYS needs to support the transaction intended. One can’t just do it in an offhand manner because those things may come back to bite one in places one would rather not be bitten!
Here is your answer from the CRA about making payments directly to an RRSP - Please pay careful attention to the conditions that must be met to qualify for the automatic waiver of the income tax withholdings.
You should also check out Guide T4001 about the “Letter of Authority” and form T1213. See
This information is available under the payroll section of the CRA’s website.