Loans; Payroll Advances and Bonuses
Canada Revenue Agency's enforcement of the Tax Act as it applies to personal benefits to owners and employees. In particular the benefits related to Shareholder/Employee Loans; Payroll Advances and Bonuses.
Bonuses; Loans and Payroll Advances:
For many years, owners and managers have been taking funds from their companies on a regular or irregular basis as needed. These funds are of a personal nature and accumulate over the fiscal year. At the year-end it has been the practice to declare a bonus payable to the employee or owner to eliminate the advances.
The position of the Canada Revenue Agency is that these are payroll advances and as such cpp and tax are to be recorded and paid on the 15th of each month following the date of the advances.
If you claim that these advances are loans, then interest is to be calculated and charged to the employee or an interest benefit is to be recorded and added to the employee's T4 at the end of each calendar year. The current prescribed rate by CRA is 7.5% per annum.
If a bonus payable is declared at the year-end and it has not been paid to the employee/owner within six months of the year-end, the CRA can reverse the bonus declared and add it to the company income. This will result in over-due taxes owing by the company and will cause penalties and interest owing from the date the year-end was required to be filed.
If the CRA brings this to your attention and you do not comply with their instruction to withhold and remit deductions at source for your advances, they can assess a penalty equal to 100% of the amount you should have deducted. In addition you will still have to pay the tax when you file your personal tax return.
Careful planning will have to go into how you take funds from your company, to insure that you do not have a problem with taxable income and deductions at source.
This policy affects all small business owners and they should review their current operating procedures to eliminate the potential of costly penalties and interest.