Re: Unpaid Remuneration - Subsection 78(4) - Your file: HAK-9691-1/RE-4040
We are writing in reply to your memorandum of May 24, 1991, wherein you requested that we confirm your view that accrued and unpaid remuneration (to an employee/shareholder) that has been reclassified by journal entry, from a "payable" account to a "loan from shareholder" account, would not constitute payment of the expense by the employer or receipt of the income by the employee/shareholder.
Our Comments
It is our opinion that the recording of a journal entry will not, in and by itself, constitute payment of remuneration from employer to the employee/shareholder. A journal entry's function is to describe and record a transaction, not to make it legally effective. If, as suggested in your memorandum, the employer and the employee/shareholder entered into an agreement whereby the employee/shareholder accepted an obligation of the corporation as payment of the remuneration, the remuneration would be considered to have been paid upon that acceptance. (Paragraph 12(b) IT-109R and paragraph 3 IT-436R). In the illustration set out in the memorandum from the Penticton D.O., it is our opinion that the remuneration in question was never paid regardless of when the deductions at source were made or remitted.
B.W. DathDirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch