Bonus accrual (s. 78(4))
A bonus accrual is a bonus a corporation records as an expense for a year before paying it. Under section 78(4) of the Income Tax Act, salary, wages or other remuneration for an office or employment, with listed exclusions, that is unpaid on the day 180 days after the year-end is deemed not incurred that year, and is treated as an expense in the year it is paid.
A seller’s corporation meets this rule when it deducts a year-end bonus it has accrued but not yet paid. Subsection 78(4) covers an expense that is a superannuation or pension benefit, a retiring allowance, salary, wages or other remuneration in respect of an office or employment. See how owner salary is normalized when valuing a business for how owner pay is read in a sale.
How the 180-day rule works
The Act excludes reasonable vacation or holiday pay and a deferred amount under a salary deferral arrangement. The CRA’s archived bulletin IT-109R2 says a payment made on the 180th day is treated as in time, and that an amount paid after the deadline is deductible in the year it is paid. It also says that where subsection 78(1) and subsection 78(4) both apply, as with unpaid salary owed to an employee not at arm’s length, subsection 78(4) governs.
What to ask
- Which bonuses or other remuneration were accrued at the last year-end and are still unpaid
- Whether payment was or will be made within 180 days of that year-end
- Who is responsible for paying them under the purchase agreement
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of Canada (Department of Justice)GovernmentIncome Tax Act, section 78 (unpaid amounts)
- 02Canada Revenue AgencyGovernmentIT109R2 ARCHIVED - Unpaid Amounts
Deavo is an advertising and listings platform, not a brokerage, law firm or valuation firm. This page is general information, not legal, tax, accounting or valuation advice, and rules differ by province. Confirm anything you rely on with a qualified professional before you act on it.