Salary deferral arrangements

If an employee is entitled at the end of the year to receive an amount in a future year and one of the main purposes for this arrangement is to defer or postpone taxation, the amount will be taxed as a benefit to the employee in the current year. This is called a salary deferral arrangement.

Some plans are excluded from this classification, such as arrangements to fund certain employee leaves of absence. As well, the rules will not apply to bonuses that are paid within three years following the end of the year in which the amount became payable. However, if the bonus is not paid within 179 days from the end of the employer’s taxation year, the employer will not be able to deduct the amount until the year it’s paid.

Tax tip: If your corporation’s year-end comes after July 6, it can deduct the bonus in the current year and the employee doesn’t have to report the amount as income until the next year. However, the corporation must declare the bonus as of its year-end but not pay it out until after December 31 and within 179 days of the year-end.