When you work in your own corporation, your salary and any bonus are decisions of the board. A resolution sets the amount, records why it is reasonable, and fixes the date a bonus is earned, which decides the year the corporation can deduct it.
That record is what the tax authorities look at. In Canada, a bonus declared at year-end must be paid within 180 days to be deducted that year. In the US, an S corporation must pay its working owners a reasonable salary before taking distributions.
- Approved by
- The directors, subject to the articles, bylaws and any unanimous shareholder agreement
- Signed by
- Every director entitled to vote, if passed in writing
- Conflict of interest
- Directors can usually vote on their own pay; Ontario is stricter
- Filed with the government
- No
- Deadline that matters
- Canada: pay a year-end bonus within 180 days; US: see the owner rules below
When you need one
- Setting or changing the salary you, or another owner, are paid as an officer or employee.
- Declaring a year-end bonus, often on your accountant’s advice to bring taxable income down.
- Paying a family member who works in the business.
- Setting fees for directors.
- A US S corporation documenting reasonable compensation for its shareholder-employees.
Who approves it
The directors set the pay of the corporation’s directors, officers and employees, subject to the articles, bylaws and any unanimous shareholder agreement. Because owners usually set their own pay, each statute also says whether a director may vote on it.
| Jurisdiction | Rule |
|---|---|
| Canada, federal (CBCA) | Directors fix the remuneration of directors, officers and employees (s. 125). A director may vote on a resolution that relates primarily to their own remuneration as a director, officer or employee (s. 120(5)(a)). |
| Ontario (OBCA) | Directors fix remuneration (s. 137). The voting exception covers only remuneration as a director (s. 132(5)(a)), and if every director has an interest, only the shareholders can approve it (s. 132(5.2)). A sole owner should approve their salary as both director and shareholder. |
| British Columbia (BCBCA) | Remuneration is set under the company’s articles; the standard articles let the directors set officers’ pay. Remuneration as a director, officer or employee isn’t a disclosable interest (s. 147(4)(c)). |
| Alberta (ABCA) | Directors fix remuneration (s. 125). A director may vote on their own remuneration as a director, officer or employee (s. 120(6)(b)). |
| Quebec (QBCA) | The board determines the remuneration of directors and officers (s. 117) and can’t delegate setting the pay of the president, CEO, CFO and similar officers (s. 118). In a corporation that isn’t a reporting issuer, a director may vote on their own pay as an officer or employee (s. 127). |
| Delaware (DGCL) | The board fixes directors’ compensation unless the certificate or bylaws say otherwise (s. 141(h)), and sets officers’ terms under the bylaws (s. 142). |
| Model Act states (MBCA) | The board may fix directors’ compensation unless the articles or bylaws say otherwise (s. 8.11); officers are appointed by the board under the bylaws (s. 8.40). |
Before you sign
- Ask your accountant about the mix. Salary, bonus or dividend: each is taxed differently, and the right mix depends on your income, RRSP or retirement plans, and the corporation’s rate.
- Record why the amount is reasonable: your role, hours and what the business would pay someone else to do the work.
- Set a payment date for a bonus, inside the deduction deadline.
- Check the payroll set-up. Salary and bonuses go through payroll with tax withheld and remitted on time.
The tax rules to plan around
- Canada, the 180-day rule. A salary or bonus deducted in a year but still unpaid 180 days after the year-end is deductible only in the year it is paid (s. 78(4) of the Income Tax Act).
- Canada, reasonableness. Expenses must be reasonable to be deductible (s. 67). The CRA has said it won’t challenge the reasonableness of salaries and bonuses a Canadian-controlled private corporation pays to shareholder-managers who are Canadian residents actively involved in day-to-day operations (Income Tax Technical News No. 22, now archived). The policy doesn’t cover inactive family shareholders.
- Canada, payroll. Salary and bonuses are reported on a T4 slip (and RL-1 in Quebec), with income tax and CPP or QPP contributions withheld. An owner who controls more than 40% of the voting shares isn’t in insurable employment for Employment Insurance (EI Act s. 5(2)(b)).
- US, S corporations. Shareholder-employees must be paid reasonable compensation before the corporation makes non-wage distributions to them, or the IRS can treat distributions as wages.
- US, C corporations. Only a reasonable allowance for salaries is deductible (26 U.S.C. § 162(a)(1)), and excessive pay that tracks shareholdings can be treated as a dividend.
- US, accrued bonuses to owners. An accrual-method corporation can deduct a bonus owed to a more-than-50% owner of a C corporation, or to any shareholder of an S corporation, only when it is paid (26 U.S.C. § 267(a)(2), (e)). For other employees, pay it within 2½ months after year-end to deduct it in that year.
Sample wording
Adapt the wording to your corporation: replace everything in square brackets, and check your articles, bylaws and any shareholder agreement first. Each person signs and dates a copy, and a scanned or electronic signature is usually fine.
Resolutions of the directors of [Corporation name] (the “Corporation”)
BE IT RESOLVED THAT:
1. The annual salary of [name], [title], is set at $[amount], effective [date], payable [monthly / every two weeks] through the Corporation’s payroll, less the deductions required by law.
2. A bonus of $[amount] is declared payable to [name] in respect of the financial year ending [date], for services rendered in that year, to be paid on or before [date, within 180 days after the year-end], less the deductions required by law.
3. The directors consider this remuneration reasonable having regard to [name]’s role, duties and time spent in the business.
The foregoing resolutions are passed by the signatures of all the directors of the Corporation, as of [date].
______________________________
[Name], director
______________________________
[Name], director
In Ontario, if the owner is the only director, have the shareholders approve or confirm the salary and bonus in a separate resolution as well (OBCA s. 132(5.2)).
Action by unanimous written consent of the board of directors of [Corporation name] (the “Corporation”)
RESOLVED, that the annual compensation of [name], [title], is set at $[amount], effective [date], payable through the Corporation’s payroll with all required withholdings, the board having determined that this amount is reasonable compensation for the services provided, based on [duties, hours worked and compensation paid for comparable services];
RESOLVED FURTHER, that a bonus of $[amount] is approved for [name] for services in the fiscal year ending [date], payable on or before [date]; and
RESOLVED FURTHER, that the officers are authorized to process this compensation through payroll.
This consent is signed by all the directors of the Corporation, is effective as of [date], and will be filed with the minutes of the proceedings of the board.
______________________________
[Name], director
______________________________
[Name], director
After you sign
- Process the salary or bonus through payroll, with income tax and contributions withheld and remitted on time.
- Pay a Canadian year-end bonus within 180 days after the year-end, and keep proof of the payment date.
- Issue T4 (and RL-1) slips by the last day of February, or W-2 forms by January 31 in the US.
- Review salaries each year, ideally when the annual financial statements are approved.
What to keep in your minute book
- The signed resolution, and any shareholders’ resolution confirming it.
- The basis for the amount: duties, hours and any comparison you relied on.
- Payroll records showing when the salary or bonus was actually paid.
Common questions
Can I vote on my own salary as a director?
Usually yes. The federal, Alberta and Quebec statutes let a director vote on their own pay as an officer or employee, and British Columbia doesn’t treat it as a conflict at all. Ontario’s exception covers only pay as a director, so a sole owner in Ontario should have the shareholders approve or confirm their salary too.
When does a year-end bonus have to be paid?
In Canada, within 180 days after the end of the corporation’s tax year, or the corporation can deduct it only in the year it is paid. In the US, a bonus owed to a controlling owner of a C corporation, or to any S corporation shareholder, is deductible only when paid.
Should I pay myself salary or dividends?
It depends on your personal tax rate, your retirement savings plans, the corporation’s tax rate and whether it is an S or C corporation in the US. Ask your accountant, then record the decision with the right resolution: this one for salary and bonuses, a dividend resolution for dividends.
Do I need a resolution for a salary that doesn’t change?
One resolution setting the salary covers it until it changes. Many owners still note it in the annual resolutions, so the minute book shows the board reviewed it each year.
This page is general information about corporate resolutions in the United States and Canada, not legal or tax advice. The sample wording is a starting point: your articles, bylaws and any shareholder agreement may require something different, and rules change over time. For advice about your corporation, speak with a qualified lawyer or accountant.
Sources
- Canada Business Corporations Act, sections 120 and 125
- Ontario Business Corporations Act, sections 132 and 137
- British Columbia Business Corporations Act, section 147
- Alberta Business Corporations Act, sections 120 and 125
- Quebec Business Corporations Act, sections 117, 118 and 127
- Delaware General Corporation Law, sections 141 and 142
- Model Business Corporation Act (American Bar Association), sections 8.11 and 8.40
- Income Tax Act (Canada), section 78
- Canada Revenue Agency: Income Tax Technical News No. 22 (archived)
- Employment Insurance Act, section 5
- IRS: S corporation compensation and medical insurance issues
- Treasury Regulations § 1.162-7, compensation for personal services
- 26 U.S. Code § 267, related-party deductions
- Treasury Regulations § 1.404(b)-1T, deferred compensation