4 December 1987 Income Tax Severed Letter 5-4009 - [871204]

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.

19(1) D. Webb (613) 957-2119

December 4, 1987

Dear Sir:

This is in reply to your letter of October 1, 1987 wherein you requested a technical interpretation relating to the application of subsection 78(4) of the Act.

For the purposes of your example you have assumed a taxation year ended June 30, 1987 and a bona fide bonus payable to the employee/shareholder of $100,000, accrued prior to that time. We respond to your questions in the order presented in your letter.

Question 1

If the corporation credits the bonus net of withholding taxes to the employee/shareholder's loan account, and the withholding taxes are paid on the 15th of the following month, is the bonus considered to be paid for purposes of subsection 78(4) of the Income Tax Act (the "Act")?

The recording of a journal entry will not by itself constitute payment of the bonus. The journal entry's function is to describe and record the transaction, not to make it legally effective. If, instead of actual payment in cash, the corporation and the shareholder enter into an agreement whereby the employee/shareholder accepted an obligation of the corporation as payment of the bonus, the bonus would be considered to have been paid upon that acceptance.

Question 2

If the corporation credits the bonus net of withholding taxes to the employee/shareholder's loan account and the withholding taxes are not paid by the 15th of the following month, is the bonus considered to be paid for purposes of subsection 78(4) of the Act?

Answer

In our view, the fact that the appropriate withholding taxes are not paid may be viewed as an indication that there is no such agreement between the corporation and the shareholder and the amount may not be considered paid. If however it is clear from the facts that the amount is considered paid by both parties and if the requisite preconditions previously described are met, then the bonus will normally be considered paid by the corporation and received by the individual.

The corporation and/or the directors of the corporation would be subject to the penalty provisions contained in the Act and the Income Tax Regulations for failure to deduct and failure to remit the appropriate withholding taxes.

Question 3

If the corporation credits the gross amount of the bonus to the employee/ shareholder's loan account and no withholding taxes are subsequently paid, is the bonus considered to be paid for purposes of subsection 78(4)?

Answer

See Answer 1 and 2 above.

Question 4

If the bonus is paid on the 180th day following the year-end, which in our example would be December 27, 1987, is the bonus deductible in the taxation year in which it was accrued or in the taxation year in which it was paid?

Answer

Provided that the bonus was a bona fide liability of the company as at June 30, 1987 and all the conditions detailed in paragraph 12(e) of Interpretation Bulletin IT-109R , dated March 25, 1981, are met, then the expense will be deductible in the taxation year incurred rather than in the taxation year it is actually paid.

The foregoing represent our general views with respect to the subject matter of your letter. The facts of a particular situation may result in different conclusions.

This opinion is not a ruling and in accordance with the guidelines explained in Information Circular 70-6R dated December 18, 1978, is not binding on the Department.

We trust our comments will be useful to you.

Yours truly,

Chief Corporate Reorganizations II Section Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch