It is tax time and you need to file T2 Returns for your newly found corporation. Preparing corporation income tax return on your own can be complex and dreadful, but I am going to provide a simple step by step procedure to prepare it. This can help to prepare and file Corporation Income Tax Return T2 yourself. Do note that that small businesses and proprietorship businesses are routinely audited and getting professional help to keep your books and accounts in good standing should be the top priority of a business owners. For business owners, time is money and time lost in answering complex audit questions can be avoided if you take preventive actions. I am also going to prepare and provide a guide for self employed individuals who want to prepare and file their personal income tax return themselves. They would require to file Schedule T2125, also called statement of business activities.
What is T2 Return ?
As per CRA, all resident corporations (except tax-exempt Crown corporations, Hutterite colonies and registered charities) have to file a corporation income tax (T2) return every tax year even if there is no tax payable. This includes:
- non-profit organizations
- tax-exempt corporations
- inactive corporations
Most corporations can file their return electronically using the Internet. It is mandatory for certain corporations with annual gross revenues that exceed $1 million.Non-resident corporations have to file a T2 return in certain situations. See Who has to file a corporation income tax (T2) return. CRA provides two different T2 returns:
- T2 Corporation Income Tax Return – This is an 9-page return that can be used by any corporation
- T2 Short Return – This is a 2-page return plus three schedules
What is Schedule T2125 ?
Schedule T2125 also known as Statement of Business or Professional Activities is a form used by self-employed individuals to report their business and professional income and expenses.
Corporation Income Tax Return T2: Preparation of tax return starts once financial Statements are ready, and taxable income is calculated. There certainly is some work involved during the process of preparation of Financial Statements. Following guidelines or simple steps can be very helpful, when preparing Financial statements:
- Collect and organize all bank statements, credit card statements
- Collect all expense receipts, and all receipts for the payments made towards tax installments, GST returns, and payroll taxes.
- Attach expense receipts to corresponding bank and credit card statements.
Organizing all the receipts will be a great step, you will be able to claim all the expenses that business incurred during the year, and it will help minimizing the tax. In bookkeeping there is a good practice called “File Once, File for Good“. It is a good practice to take all receipts and file them as they come in once and in a manner that they only need to be reviewed when you are filing your returns. Not having a good receipt filing system can increase work for business owners when CRA comes calling and asks for supporting receipts for all expenses. So, remember to “File Once, File for Good“. In another post, we will also discuss other good practices that will make a business owners life easy. Okie, so, let us get back to the preparation for filing T2 Returns.
To create financial statements, you should have gathered all the documents as explained above, you are now ready to prepare Financial Statements. Income statement and balance sheet would be required to prepare Corporation Income Tax Return – T2. A brief explanation of Balance Sheet, and Income Statement is given below.
Income Statement: it is also called Schedule 125 on Corporation Income Tax Return – It is the difference between your Firm’s revenue and expenses, where it depicts the profit / taxable income for the corporation.Income statement, let us take an example here, prepare income statement of ALPHA AIRLINES LTD. ALPHA AIRLINES LTD. is a fictitious company.
Revenue / Sales: 250,000
Expenses: 175,000 (Includes golf club membership – $3,000)
Balance Sheet ALPHA AIRLINES LTD.
Assets: 17,500 (office equipment – $5,000, vehicle 10,000)
Liabilities (accounts payable, and GST payable): 5,200
Shareholder’s equity and Retained Earnings: 12,300
Assets in balance sheet are further classified as Current, and Capital assets, it is important to classify those correctly as it can significantly affect the taxes and interpretation of the financial situation of the company. CRA has extensively outlined the various classification numbers for each type of assets. Please reach out to us through the contact form if you have any confusion about these classification categories. Similarly, liabilities can be short term and long term and should be classified and represented correctly.
Assuming that financial statements are ready, more information and resources are required to prepare and file T2 return:
a) T2 Forms – You can purchase tax programs or prepare return by downloading fillable forms and schedules from Canada Revenue Agency’s website.
b) You will also be required to know GIFI – General Index of Financial Information in order for you to enter information in balance sheet (S100) and income statement (S125). Here is a full list of GIFI Codes also called GIFI-Code-Chart-of-Accounts.
There are a number of schedules that would be required to be completed based on many factors, if you click on T2 Return and Schedules. You can view complete list of schedules and forms. The list of common schedules to be completed with the Corporation’s Income Tax Return T2:
S100: Schedule 100 is to add balance sheet accounts using appropriate GIFI codes. Please note the assets and liabilities in the balance sheet should balance. One of the example of GIFI code: GIFI code for inventory is:
S125: Schedule 125 is the summary of income statement. Add revenue and operating expenses information in this schedule using correct GIFI codes.
S50: This schedule has shareholder’s information, that is name, percent of shareholding, and Social Insurance Number of the shareholder.
S8: Schedule 8 is very important schedule on Corporation Income Tax Return, it is called CCA schedule, and all capital assets of the corporation those are depreciable over a period of time are represented in this schedule for the calculation of the Capital Cost Allowance.
In the case of Alpha Airlines Ltd., they have a vehicle worth $10,000, and office equipment $5,000. The vehicle is class 10 asset depreciable at 30%, similarly office equipment is class 8 asset that is depreciable at 20%.
Total CCA that Alpha Airlines Ltd will be able to claim would be $4,000
See below the snapshot of form displaying schedule 8.
S1: Schedule 1 is used to calculate net income for tax purposes. Accounting income is generally different from taxable income. Few items that got deducted while calculating income get added back. For example, in the case of our example corporation ALPHA AIRLINES LTD. the accounting income is $175,00 that had a deduction of $3,000 for Golf Club Membership, it will get added back, Capital cost calculated on office equipment ($1,000), and vehicle ($3,000), a total of $4,000 will be deducted. The taxable income of ALPHA AIRLINES LTD would be:
Net income after operating expenses: 75,000
Add back golf club membership $3,000
Minus CCA $4,000
Income for tax purposes $74,000
Examples of other expenses that can not be claimed as business expenses are:
- Life insurance premiums
- Only 50% of the meals and entertainment expense is deductible
- Personal business clothing
- Sports club memberships
Schedule 24: if the corporation is new, and it is first year of filing income tax return, the corporation is required to complete schedule 24. This schedule also needs be completed in the case of amalgamation, or wind up of a subsidiary into parent corporation.
See below a copy of the form for quick reference:
Schedule 3: Dividends paid to Shareholders, and Dividends received: if It is decided to pay dividends to shareholder, the amount must be reported on box 500 of the schedule 3. Dividends are a form of remuneration paid to shareholders. Dividends and salaries / bonuses is a good tool for tax planning. Check with your accountant at the time of finalizing your corporation income taxes to have more understanding of dividends.
Schedule 11: Transactions between shareholders / officers, and corporation. This schedule is prepared to record transactions such as:
- Amounts of money taken out of the corporation by the shareholders / directors for personal use.
- Amounts of money transferred into the corporation by shareholder / directors to run business.
- Any personal assets transferred by shareholders to the corporation.
- If the sole propriety was converted to corporation and assets were rolled over (Section 85 roll over).
Schedule 2: Corporation Income Tax Return T2. This schedule is a nine-page schedule that has a lot of information to complete. We will go over page wise to understand this schedule. See below page one the total form.
This page has several boxes divided in left and right columns.
Box 001: Fill in business number of the corporation
Box 002: Legal Name of the corporation, if you are planning to file online, make sure your corporation name is spelled correctly, as in the incorporation papers of the corporation
Box 010: tick Yes or No based on if address of the corporation is changed or not. If there was a change in address, then you will need to complete Box 11 to Box 18
Box 20 to Box 28: you will need to complete these boxes if mailing address is different, other wise just click ‘No’ on box 20
Box 30 to Box 38: similarly, you will need to fill these boxes if books and records of corporation are kept at separate address, otherwise click ‘No’ on box 30.
Box 40: For most small businesses, the option to select for type of corporation would be number 1, Canadian Controlled Private Corporation (CCPC)
Box 43: This would not be applicable to most small businesses, this box would be left blank.
Box 60 and Box 61: These two boxes are start and end of the fiscal year of the corporation. For example, the year end of ALPHA AIRLINES is December 31, and the tax year in question is 2016:
Box 60: January 01, 2016
Box 61: December 31, 2016
Box 63- Box 67: those boxes are very case specific and would not be applicable to all businesses.
Box 70: Please tick yes if this is the first year of filing after incorporation
Box 72 – Box 79: These boxes are again case specific, and would need to be filled in the case those are applicable
Box 80: For most businesses, it would be a YES, but if the corporation in question is not resident of Canada, it would be a ‘NO’
Box 85: This box would not be applicable to most Canadian businesses and would be left blank.
Once all the above-mentioned schedules along with page 1 of the schedule 200 are filled, the corporation tax return is ready to see the amount of tax owing, most programs have a tax summary page that will display Federal and Provincial tax amounts. After completing your tax return, please date and sign on page 9 of the return. This form will capture the name of the signing person from previous information already completed.
Most of the tax programs used to prepare T2 return will prompt to complete the missing information. Once everything is completed, print the form and sign on Page 9 of the Schedule 200. Any small mistakes can make you pay higher than normal taxes if the errors/mistakes are caught later by Canada Revenue Agency.
You have filed your return and are getting ready to focus on developing and growing the business.
Do not forget to remit taxes to CRA and be aware of the due dates. Corporation income taxes are due after 90 days of the year end date. It is a good practice to carry out a rough calculation of the taxes you owe and make an over-payment to CRA three months or 90 days after your year end.
As returns have to be filed 180 days after the financial year end but taxes are due 90 days after year end, some business owners may have to pay penalty for not remitting the taxes by the due date. As such, it is a good practice to make a rough over-payment to CRA within 90 days of your end. The taxes can be paid online using Canada Revenue Agency’s website or through tax payment menu of majority of the banks. You may have to call and set login information to be able to pay Federal and Provincial taxes from your banks using online services.
If you find the filing process daunting and challenging as some business owners do, please contact a qualified accountant. We provide a 45 minutes free consultation and if you want to take up on this offer, please call us or contact us through the contact page.