24 August 2000 External T.I. 2000-0041255 - UNPAID AMOUNT; BONUS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: income tax treatment of unpaid amount

Position: expense reversed until actually paid

Reasons: 78(4)

						2000-004125
XXXXXXXXXX 	Denise Dalphy
(613) 957-9231
Attention: XXXXXXXXXX 

August 24, 2000

Dear Sirs:

Re: Unpaid Amount

We are writing in reply to your letter dated August 8, 2000 wherein you inquire about our interpretation of subsection 78(4) of the Income Tax Act (the "Act") in a particular fact situation.

You have described a situation where a Canadian controlled private corporation ("OPCO") accrued a bonus to its sole shareholder/manager at its year end of April 30, 1996 year end, but did not pay the bonus within 180 days of that year end. You advise that: "The 1996 T2 was amended to delete the $20,000 deduction originally taken for the bonus accrued".

You have enquired whether "To arrive at 4/30/2000 taxable income is OPCO allowed to reduce accounting income by the $20,000 bonus reversal?" in view of the fact that "OPCO's 4/30/2000 accounting income was increased by the $20,000 bonus reversal but no tax deduction was ever taken for the amount".

Although you have asked for a technical interpretation in a hypothetical situation, the scenario described seems to involve actual transactions. As explained in Information Circular 70-6R3, it is not the practice of the Canada Customs and Revenue Agency (CCRA) to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation to the relevant Tax Services Office for their views. We are, however, prepared to offer the following general comments concerning the above scenario.

As a preliminary observation, based on the limited facts available to us, it is not obvious that an amount was actually "incurred" by OPCO in 1996, nor that the "bonus" was, in fact, "salary, wages or other remuneration" within the meaning of subsection 78(4) of the Act. However, for the purpose of our response, we assume that this is the case, and that the amendment to the T2 was made pursuant to the requirements of subsection 78(4) of the Act.

The effect of subsection 78(4) of the Act is that, for income tax purposes, the deduction for the employer is reversed for the taxation year in which the amount was actually incurred but unpaid. The amount is subsequently deemed to have been incurred by the employer if and when the amount is actually paid. Other than this, and regardless of how the transactions have been recorded for accounting purposes, the foregoing would be the only impact on the computation of income for the purposes of the Act.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the CCRA. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Steve Tevlin
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings Directorate
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