This may seem like a dumb question... Say a company makes a profit and
at the end of the fiscal year simply buys more services from a
consultant but does not pay cash, simply logs a note payable to be paid
whenever they have the money (the consultant is ok with that). This
way, the company avoids a profit and then does not pay taxes. The note
payable could be due to be paid back in a long time... like 10 or 100
years. Clearly, the company could keep doing this year after year.
This seems like some kind of fraud to me. But I would like to know
exactly what law it is breaking (Canada).
I guess this also kind of extends into the question of... what happens
if someone pays extra for a service.. is that not allowed too?
In an audit, they will look at the underlying support for the expense. What
documentation do you have to support the transaction of booking an expense
for a service that hasn't been paid yet? Was the service a legitimate
service with a business purpose? Was the service provided to the business
during the tax year in question?
Prepayment of a future service is not an expense until the service is
performed (accounting law), and as such the payment should be booked as an
asset. But, you haven't paid for it yet, so there's nothing to book.
If a service has been performed, you can book the expense and the liability
to be paid in "10 or 100 years". But you had better have the support to
If you actually pay it, then you can actually deduct it. If the overpayment
gets refunded to you (ie: like a kickback), that kickback is income to the
business. If it's not paid back, then it's income to the persona who
Paul Thomas, CPA
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