For many small business owners, the popular tax planning strategy for year-end is to defer salary. If you don’t have a professional accountant, can you DIY? Sure. Here is what and how.

What is the purpose of deferring salary? The top reason is to reduce taxable income in a corporation in a given year so that the corporation can pay less tax or no tax for that particular year. Then how? It is simply to record an unpaid salary (most likely for owner management) on the corporation’s books at a given year-end.

It sounds too easy, doesn’t it? A few things to watch out:

• The deferred salary must be paid out within 180 days of the corporation’s year-end. Otherwise, the CRA will disallow the deduction.
• The purpose of deferring the salary is no only to pay less tax or no tax on corporation side but also to consider owner management’s personal tax as well. Some owners may have sufficient income already.
• The deferral only makes senses when corporations with fiscal year-ends between July 5 and December 31. Why? The reason is to allow the deferred salary to be included in owner/manager’s T1 in the next calendar year.
• Remember to withhold/submit payroll deduction when the amount is paid. The due date is the 15th of the month after the payment of the salary Otherwise; the CRA will impose penalty and interest on the outstanding remittance.

What if the corporation has no funds available to pay out due to cash crunch?

The common practice is to cut a cheque from the corporation for the amount and immediately deposited into the corporation bank account.

Why do we do this?
Well, from the CRA’s perspective, this is the proof of payment of the salary paid out. If the payout is recorded as a paper entry as follows:

Record salary to be paid out after year-end
Debit: Salary expenses
Credit: Accounts payable

Record salary paid out in current year
Debit: Accounts payable
Credit: Salary expenses

What will happen? The payment by “journal entry” can be challenged by the Canada Revenue Agency. Life will not be easier after that. If you have challenges in DIY your own tax planning, give Alex Lin CPA CA a call @647-872-6656. We surely can help!