Subsection 78(4) – Liability Assumed by a Third Party
Subsection 78(4) deems certain remuneration, which remains unpaid 180 days after the end of the taxation year in which it was accrued, to be an expense in the taxation year in which it is paid. However, the deductibility of remuneration is unclear where subsection 78(4) applies to a non-contingent liability accrued by a company (“A Co”) which liability is assumed by another company (“B Co”) as part of the consideration paid for the purchase of A Co’s business (including its employees).
Question
In this scenario, does the CRA concur that the deductibility of the expense for A Co occurs in the year the payment is made by B Co (i.e., the year in which the remuneration is taxable to the employee(s))?
Response
In this scenario, the deductibility of the expense for A Co occurs in the year the payment is made by B Co. However, B Co is not entitled to deduct payments to employees representing remuneration earned while such employees were employed by A Co.