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.
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).
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
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.
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.
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…
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.
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.
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.
Back dating accounting software after yearend to pay SCorp owner a bonus that was not accrued in previous year but intended to look like it was ran with yearend payroll. Example, January 5th 2013, draft financials showed net profit, so to decrease net profit owner back dated and added a $10,000 to self 12/31/2012. Is this legal?
No. A bonus recorded as having been paid in 2012 would have to be on a 2012 T4. That’s 11 years late. Source deductions were due in January, 2013. That’s 10 years late. You also can’t accrue a bonus as it had to be paid within 180 days of the year end. Also 10 years late.
