Note payable to avoid taxes

Hello,
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?
Thanks! NL
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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 prove that.

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 received it.
--
Paul Thomas, CPA
snipped-for-privacy@bellsouth.net
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