Section 5 – Employees
A bonus can be deferred for a maximum of three years. Since the employee is taxed only upon receiving the amount, the employer may only claim the deduction at that time. However, if the bonus is paid within 180 days following the end of the taxation year it is declared, it can be deducted in the year (see Section VI).
Employee Benefit Plan
Under an Employee Benefit Plan, the employer deposits a portion of an employee’s salary at his/her request. The employee is taxed when amounts are paid by the plan and the employer may only deduct plan contributions when amounts become taxable to the employee as income from an office or employment. Generally, investment income generated by plan funds must be attributed to the employees annually and taxed in their hands.
Salary Deferral Arrangement
The salary deferral arrangement rules limit income tax deferrals. When the conditions are met, the employee has to include the value of the amount owing in the year the services were rendered and not in the year the payment is received.
Sabbatical leave is an exception to the salary deferral arrangement. The employer withholds a portion of an employee’s salary for up to six years so that the employee may be paid during his/her sabbatical leave. The employee is taxed when amounts are received, at which time the employer claims the related expense. Certain conditions relating to the length of the leave and the employee’s return must be met in order for the employee to be able to defer taxation of the amounts.29
29 In response to the COVID-19 crisis, the Government of Canada has proposed a number of legislative amendments to provide for some flexibility in terms of the conditions to be met, particularly with respect to the leave period and the maximum pay deferral period. For more details, consult Finance Canada's website.
This document is up to date as of September 3, 2020 and reflects the status of legislation, including proposed amendments at this date.