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Expert: Michelle O'Brien-Moran
I would like to know where and how do I deduct a commission payment from a corporate return that was not submitted until after the company's year end. The general account reflects the payment after the year end. I am hoping that I won't have to pay corporate tax on it.
Michelle O'Brien-Moran answered:
A business generally is required under the Income Tax Act to report income and expenses on the accrual basis of accounting. There are a few exceptions to this general rule. Income from farming and fishing are allowed to compute income on a cash basis.
We are assuming that because you are looking to “deduct a commission payment” that this is an expense for your company and not income for your company (i.e. that someone made a commission payment to you).
With respect to the commission payment made after the year end, what needs to be determined is whether or not the expense was incurred prior to the corporation's yearend and relates to that yearend that has already occurred or, if it was incurred in order to earn income for the subsequent taxation year. If it was incurred to earn income for the taxation year that you have completed, an accounts payable should be set up to reflect the expenses incurred prior to yearend but not paid until after yearend.
Under the income tax system, using the accrual basis of accounting generally follows the legal form for revenues and expenses. For an expense to be deductible in a particular taxation year, there must be a clear and unconditional legal obligation to pay an amount. For example, if the commission payment, under the commission contract, is payable upon sale of the Company's product or service, then the commission costs relating to the sale would become payable at the date of that particular sale.
However, if the commission contract stipulates that a commission payment is not payable until receipt of cash from the Company's sale of the related product or service, the commission payment would not be payable until that point in time.
Should the commission payment qualify as an expense prior to your corporate year end, then you would be able to set up an accounts payable and deduct this expense on your corporate tax return.
About the author
Michelle O’Brien-Moran, CA is a Partner with Meyers Norris Penny LLP, Chartered Accountants and Business Advisors.