T2047: an unpaid related party expense goes back into income in year 3

When does an unpaid expense go back into income?

Subsection 78(1) has three conditions. Your client deducted an outlay or expense, it's owed to a person your client didn't deal with at arm's length both when it was incurred and at the end of the second taxation year after that year, and it's still unpaid at that second year end. If all three hold, the unpaid amount goes into income for the third taxation year after the year it was incurred laws-lois.justice.gc.ca.

For a December 31 year end, the test dates and the T2047 deadlines run like this:

The T2047 deadline is the day the debtor's return for that third year is due laws-lois.justice.gc.ca. For a corporation that's six months after year end, and for a year ending on a month's last day, the last day of the sixth month canada.ca. So in October 2026, the live file is 2023 accruals: they were caught on December 31, 2025, and their agreement is due June 30, 2027.

Related persons are deemed not to deal at arm's length, and that covers a corporation and the person or related group that controls it, plus family connected by blood, marriage, common law partnership or adoption. For unrelated people, arm's length is a question of fact laws-lois.justice.gc.ca.

What does the T2047 actually do?

When the debtor and the creditor file the agreement in time, the unpaid amount is deemed paid by the debtor and received by the creditor on the first day of the third taxation year. The creditor is then deemed to have lent that same amount back to the debtor, less any tax the debtor withheld on account of the creditor's tax laws-lois.justice.gc.ca. No income inclusion for the debtor, and the balance stays on the books as a loan instead of a payable.

The form is T2047, Agreement in Respect of Unpaid Amounts canada.ca. Its instructions say to mail two completed copies, signed by both the debtor and the creditor, to the debtor's tax centre, separately from any tax return. It asks for both names and SIN or business numbers, the unpaid amount, the debtor's tax year the debt was incurred, and the first day of the third tax year canada.ca.

The deemed receipt counts on the creditor's side too. If the creditor only reports that kind of income when it's received, the agreement puts it in the creditor's income on the first day of the third year. For a creditor that isn't resident in Canada, the CRA's archived bulletin says the deemed payment triggers Part XIII withholding at that point canada.ca. See treaty withholding rates.

What does $40,000 of unpaid management fees cost Opco with and without a T2047?

Opco has a December 31 year end. In 2023 it accrued and deducted $40,000 of management fees owed to Holdco, which controls it. Nothing was paid, and the fees were still owing on December 31, 2025. Here is what each choice costs Opco:

The late row comes from subsection 78(3): a late agreement still applies, but 25% of the unpaid amount is still added to income under 78(1)(a) laws-lois.justice.gc.ca. On $40,000, that's $40,000 × 25% = $10,000 of extra 2026 income for Opco, against $40,000 with no agreement at all.

Paying the fees in 2026 does not help with the 2023 accrual. The test date was December 31, 2025, and the form itself says the amount is included in the third year where no agreement is filed. The fix after the test date is the T2047.

Why an accrued bonus follows a different rule

Salary, wages and other remuneration fall under subsection 78(4) instead. If the amount is still unpaid 180 days after the end of the year it was incurred, it's deemed not incurred in that year and deductible only in the year it's paid. Reasonable vacation or holiday pay and deferred amounts under a salary deferral arrangement are left out laws-lois.justice.gc.ca.

Subsection 78(5) says 78(1) doesn't apply where 78(4) applies, so a T2047 can't rescue an unpaid bonus owed to an owner manager laws-lois.justice.gc.ca. The form says the same: it covers a deductible expense other than employee remuneration canada.ca. The 180 day rule has its own page: accrued bonus timing.

Which edge cases catch accountants?

A corporation wound up before the end of that second taxation year doesn't get the full window. Subsection 78(2) adds the amount still owed to a person it didn't deal with at arm's length into income for the year it's wound up laws-lois.justice.gc.ca. Check open intercompany payables before a section 88 wind up.

The count is in taxation years, not calendar years laws-lois.justice.gc.ca. A short year, for example after a change of year end or an acquisition of control, uses up one of the two years and brings the test date forward.

The arm's length test applies at two moments: when the expense was incurred and at the end of the second year laws-lois.justice.gc.ca. If the creditor became arm's length before that second year end, for example after a sale of the shares, 78(1) doesn't apply to that payable.

Accrued interest on a shareholder loan owed to the shareholder is a common 78(1) item. The shareholder loan account page covers how it sits on the books.