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Management Bonus

*Technical Question

Taxpayer paid themselves a low salary for the last six months of the year (first year of business)- $1000.00/mnth - $6,000.00 for 2019. This $6,000 has already been processed through payroll and the necessary remittances have been completed.

Taxpayer wants a management bonus at year-end Dec 31, 2019 & can pay right themselves right away or shortly after because the business has sufficient funds. The bonus will paid in the first pay period of 2020. Thoughts on the fellowing journal entries?

Bonus will be around $20,000 - $30,000. $25,000 as an average will be used.

Thank you for your suggestions and insights ahead of time.

Are the taxpayers shareholders, too? If yes, EI may not be applicable.

Atul

Atul Shah

ATUL SHAH INC.

Phone: 604 569-SHAH (7424)

Fax : 604-569-0146

288 West 8th Avenue

Vancouver BC V5Y 1N5

www.smartax.ca

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I’ll reinforce Atul’s comment, no CPP if owner-managers.

Also, the bonus declared in 2019 is an expense to the Corp in 2019 as long as it is paid within 180 days of year end ( ITA 78(4)). I can’t recall if EI Employer amounts can also be expensed in 2019 or not as it is recognized at the time the bonus is declared. Also note that CRA has interpreted the 180 day rule to also mean remittance paid within 180 days (not the next remittance period if payment made on day 180).

The source deduction for tax will need to be reviewed via a payroll calculator as it will need to be withheld at the expected 2020 marginal T1 rate. See CRA - https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/special-payments/bonuses-retroactive-pay-increases-irregular-amounts.html

Greg.

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CPP will apply but not EI.

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My mistake - no EI for owner managers is correct

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Bonus should be calculated by bonus tax method
You can use CRA online pay calculator to make sure right amount of tax is deducted and remitted
And client don’t owe to Cra more then deductions

Thanks

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@atul Yes, you are correct and thank you
@gregory @obhorst @mintogrewal Thank you for your replies

Yes the taxpayer is a 100% shareholder and I found in Guide t4001 Employers’ Guide
Payroll Deductions and Remittances pg 22 (PDF) the following:

Employment
Even if there is a contract of service, payments for the
following types of employment are not insurable and
EI premiums do not have to be deducted:

When a corporation employs a person who controls more
than 40% of the corporation’s voting shares.

Are there any other suggestions/considerations?

If they and/or a “related person” control 40% or more of the voting shares

image001.jpg

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The main thing I would say is the same as @gregory - the payroll expense (most of entry #2) should be recorded in Dec 2019. Why else would you make it a “bonus”? If you record the expense in January, it’s no different than normal salary/payroll. The special characteristic of a “bonus” is that the corp can claim a deduction in the current year (2019) without having to pay the employee for 6 months. (and you remit the source deductions only when you pay the employee).

I suppose you COULD pay a bonus in January, and make use of the delayed payment/remittance - just that the corp tax deduction (i.e. salary expense) will be deferred one year.

BTW - here’s CRA’s bonus method calculation:
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/special-payments/example-1-first-once-a-year-bonus-payment.html

Hope that helps!

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Wait - is “Management bonus” an expense account? LOL, I guess I should have looked closer. Then, I think you have it right, other than the few issues others have already posted…

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I had an interesting payroll audit few months ago (pre-TOSI days). The discretionary family trust owned 100% shares of OPCO; with minimum shares to parents. The OPCO paid very reasonable salaries
to two children (between 18 and 22) and EI was not deducted.

The auditor proposed to charge EI as the children were not the shareholders directly. After few rounds of discussions (what stops OPCO paying salaries to the children; and then stopping it 0- with
children claiming EI in subsequent months – much higher that EI premium collected, etc.), the tax auditor backed off; and my client got a clean chit. No need to deduct EI on salaries paid to the children, too!

Post TOSI, the planning may work ONLY with modifications.

Atul

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https://www.canada.ca/en/services/benefits/ei/ei-self-employed-workers.html

A major shareholder (40% +) can elect to pay EI premiums to qualify for “special benefits” such as maternity and parental benefits on the same basis a a self-employed person.

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Thank you everyone for your tips, suggestions, and insights. Grateful & appreciative for the replies!

Warning - Once you elect to pay, you can’t elect not to pay later. And you have to pay for a year before you can claim.

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I would always advise against electing to pay EI on self employed income. As far as I am concerned, it is nothing but a trap for an unsuspecting young woman to fall into. It looks good until you read all about it. You can’t win on this one.

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