Bonus Accruals

The deadline and the deduction

A bonus accrual records compensation earned but not yet paid. It is not enough to choose an amount that brings corporate income below the small business limit: the expense must actually be incurred and reasonable for the work performed.

Under Income Tax Act s.78(4), remuneration still unpaid on the day 180 days after the corporation's year-end is treated as not incurred in that original year. The deduction moves to the year of payment. This is not the separate two-year unpaid-expense rule in s.78(1), which s.78(5) excludes for remuneration covered by s.78(4).

Plan payment before day 180 and document the deadline. A 179-day internal target is a safety margin, not the wording of the Act. If payment is late, add the accrued amount back when calculating the original year's taxable income; correct a return already filed if necessary.

Payment and payroll are separate steps

When the bonus is paid, calculate income-tax withholding using CRA's bonus method and determine the applicable CPP and EI deductions. The employee reports the bonus in the calendar year received, and the employer reports it on that year's T4. See CRA's bonus payment instructions.

The payroll remittance deadline follows the employer's remitter category, not the bonus-deduction deadline. Do not assume every employer remits on the 15th of the next month. CRA's payroll guide explains the categories and calculation process.

A CPP maximum reached in December does not carry forward into January. Use the payment year's rates and that employee's contributions with this employer in that calendar year. Whether an owner-manager's employment is EI-insurable also needs to be determined; it is not automatically the same as CPP.

Example: a July year-end

Assume a BC CCPC incurs a reasonable $120,000 bonus for its working owner-manager in its year ending July 31, 2026. Its taxable active business income before that bonus is $620,000, and it has the full $500,000 business limit available. Other adjustments are excluded from this illustration.

The payroll calculation must use 2027 parameters and 2027 year-to-date earnings. This example does not invent a future withholding amount or assume CPP is already exhausted after two weeks. If the bonus remains unpaid on January 27, the $120,000 deduction is denied for the July 2026 year and considered in the year it is actually paid.

Records to keep

Keep the compensation approval, basis for the amount, accrued liability, payroll calculation, payment evidence and remittance confirmation together. A bare journal entry labelled paid is insufficient evidence by itself. A shareholder-account set-off requires advice on whether it legally effects payment and meets withholding requirements; do not assume either that every credit qualifies or that only a physical cheque can qualify.

Discuss the amount and payment method before year-end. The timing does not remove personal tax, reasonableness requirements or restrictions on the salary-versus-dividends decision. Related-party compensation also intersects with management fees and family remuneration rules.