Source: http://www.mktaxaccounting.com/additions/324-2/
Timestamp: 2019-04-25 08:05:52+00:00

Document:
In order for an expense to be “incurred”, an amount must be paid or there must be a legal obligation to pay an amount (see The Queen v. Ken & Ray’s Collins Bay Supermarket Ltd., 75 DTC 5346,  CTC 504 (FCTD) as well as Newfoundland Light & Power Co. Ltd. v. H.M.Q. 90 DTC 6166, 1 CTC 229 (FCA)).
Has the expense been incurred? If a genuine liability exists at the end of the year, an expense has been incurred. If there is some uncertainty associated with the liability, if it is a reserve or a contingent liability, its deduction is specifically denied under paragraph 18(1)(e) (unless it is specifically permitted elsewhere in Part I of the Act).
– the likelihood of payment of the bonus is questionable.
A number of Court decisions have dealt with the existence of a legal obligation in respect of accrued bonuses. In McClain Industries of Canada Inc., 78 DTC 6356,  CTC 511 (FCTD), bonuses were historically a component of compensation. They were predicated on the general principles enumerated in a directors’ resolution passed 22 years earlier. These principles, consistently followed by actual payments supported the characterization of the accrued amounts as actual liabilities.
In Evergreen’s case, bonuses had been accrued and paid in the last 10 years pursuant to a 19X4 directors resolution. The accrual in the accounts and the payments in the previous years indicate an established pattern of accruing and paying bonuses. The fact that the bonus will not be paid does not in itself indicate that a liability did not exist at year end. As indicated in the Brazolot case, the inability to pay the bonus resulted from events that occurred after the year end. At the time that the bonus was accrued, there was every intention and ability to pay the bonus and therefore, at the year end, a genuine liability did exist.
With respect to the fact that the bonus was not precisely determined or set up in the accounts until after the year end, it is common for companies to base their bonuses on the profits for the year, in which case, the precise amount and the accounting entries are not made until after the year end. In the case of V. R. Enterprises Limited v. MNR, 74 DTC 1089,  DTC 2099 (TRB), 79 DTC 5399,  CTC 465 (FCTD), the Court described criteria for the deductibility of bonuses. It indicated that the bonus accrued in a particular year must be established within a reasonable time from the moment the corporation’s profit for that year has been determined.
In the case of Pioneer Designs Corporation v. MNR, 91 DTC 293,  2 CTC 2446 (TCC), the company bonused down to the small business limit for the year. One of the Minister’s arguments for denying the deduction was that the bonus was principally motivated by the corporation’s desire to benefit from the low rate of tax. However, in the Court’s view, the main reason for accruing the bonuses was to compensate directors for their successful management of the business.
Note, not only must an expense be incurred for the purpose of earning income from a business or property (pursuant to paragraph 18(1)(a)), to be deductible for tax purposes, it must also be reasonable in the circumstances in accordance with the general limitation found in section 67. Whether an expense is reasonable or not in the circumstances is a question of fact, determined by the particular situation.
In V.R. Enterprises Limited v. MNR, the Court indicated that one of the criteria for the deductibility of bonuses was that the amount must be reasonable in comparison with the profit earned by the company and the services rendered by the recipients.
This means that the amount cannot be paid on the 180th day to avoid application of the provision because it was unpaid at some time on the 180th day.

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