Can money be put into a reserve fund to be used for future severance payments?
By Hank Bulmash | May 30, 2010
I have operated a small engineering consulting business employing about four people for about five years now. We are finally past break even income wise and have built up a small cash balance at the bank that I would notionally like to assign a "future severance pay" for the day we eventually decide to close up shop.
Is there some way to post the future liability and reserve this cash to cover it. We are in Alberta and with our labour laws the company (me) is on the hook for each person to the tune of about two months salary. I'd like to put this amount in an account somewhere for the pay out and try for a corporate tax break now.
Any thoughts on how to post this and avoid the corporate tax on the original amount (it will eventually all go out as source deductions on the amounts eventually paid out).
Hank Bulmash answered:
The idea of a reserve for future severance payments required by law is clever, but it doesn't fly. The Income Tax Act forbids the deduction of reserves in general including the one you are suggesting.
Your company will be allowed a deduction for severance pay only when the amounts are actually paid.