A joint-stock company makes expenditures throughout the year to operate its business. These include the acquisition and use of a corporate vehicle. These investments provide incorporated companies many tax benefits; however, they also involve certain obligations. Indeed, these entities require more comprehensive accounting, including the production of a balance sheet in addition to the income statement.
Discover the requirements that joint-stock companies must meet to file their T2 and CO-17 corporate income tax returns.
The accounting obligations of a joint-stock company
When managing a joint-stock company, we have additional obligations that a self-employed person is not necessarily subject to. In fact, to do personal taxes, a self-employed individual can simply produce an income statement by keeping a record of income, expenses, accounts payable and accounts receivable. This is relatively simple and can easily be done on an Excel spreadsheet or on paper.
On the other hand, in addition to keeping these records, joint-stock companies must produce information on all their bank accounts, credit cards, lines of credit, loans, advances to shareholders, tax accounts, etc. Add to this the need to produce a comprehensive financial report. This is much more complex to do alone and requires more work and accounting knowledge.
In effect, a joint-stock company must keep full accounting records of its operation, including credit and debit records, for the purpose of filing income tax returns. The theory goes that for each accounting entry or transaction, there are two managers who maintain both accounts simultaneously: one for debit and the other for credit. This management can be complicated, which is why we recommend that joint-stock company owners choose accounting software to simplify the understanding and maintenance of their accounting records.
Filing your tax returns
An incorporated company is required to file its T2 corporate tax returns at the federal level and CO-17 at the provincial level each year. To do this, it must prepare an accounting document of its financial statements including the income statement and the balance sheet.
1- Income statement
The income statement is an important component of the financial statement and consists of listing a company's revenues and expenses. This accounting document is required to file your tax return.
When completing your company's income statement, it's important to exclude the taxes on your amounts. Essentially, if you have just made a sale of $1000 + taxes, a total of $1149.98, you only need to enter the $1000 in the sales account. Taxes must then be transferred to the government. In the case where your turnover is $30,000 or more in a period of 12 consecutive months, you are required to register for the GST/QST.
Moreover, with the exception of a few rare cases such as agriculture, mining or fishing, you must include income from yet-to-be-paid invoices in the financial statements. Likewise, you must include the expenses invoiced, even if they have yet to be paid.
It is also important to distinguish between different sources of income since the manner in which they are taxed diverges from one source to another. Here are some examples of main sources of income:
- Sales (revenue of your business operations)
- Interest income on loans or investments
- Dividend income from investments
- Capital gain income
- Rental income
- Dividend income of affiliated companies
By contrast, for most small and medium-sized companies, all revenues come from sales. Spending time identifying the source is unnecessary.
Concerning expenses, here are some important things to know:
- Try to separate the different categories of your expenses as much as possible. This will make it easier for you to classify them in tax reports.
- It is important to distinguish all expenses related to restaurant, bar and gifts to customers in your expense categories, since these are treated differently.
- The same applies to tax penalties and interest or fees for delays or other problems with the tax authorities.
- The purchase of computer equipment, office equipment, a car, a building or any other capital that is not consumed in a single year should not be included in the income statement expense, but rather in the balance sheet asset accounts. These will be amortized over several years according to the tax category prescribed in the tax returns.
In summary, to determine your income statement revenues, you need to sum all of your income (by revenue source category) while excluding taxes from the calculation. The same principle applies for expenses. Essentially, you must sum all your expenses by expenditure category while excluding taxes from the calculation and add this data to the income statement.
2- The balance sheet
The balance sheet is another important component of a company's financial statement and is also essential for reporting your income. It consists of listing all the assets and debts of a company. This accounting document is much more difficult and technical to produce. For this reason, it is strongly recommended to use accounting software or a pre-made Excel spreadsheet to avoid errors when preparing your tax return.
First, it is important to understand that the balance sheet consists of three types of accounts: assets, liabilities, as well as shareholder equity and retained earnings. When drawing up a balance sheet, the total assets must be equal to the total liabilities added to the shareholder equity and retained earnings accounts.
People sometimes decide to create a balance sheet using only shortcuts, by entering amounts for bank account, accounts receivable, accounts payable, tax accounts and amounts for shareholder equity and retained earnings. If you wish to proceed in this manner, keep in mind that you need at least two accounts for the retained earnings section:
- Retained earnings from prior years, corresponding to total retained earnings in last year's balance sheet.
- Net income for the year that is the result of the profit or loss in the current fiscal year’s income statement.
Many entrepreneurs, and even some accountants, work in this way to produce their balance sheets. However, it is not recommended to proceed in this manner, for several reasons.
First, this method does not establish complete accounting records. It is easy to forget several transactions that can have significant impacts (expenses, revenues, deposits or receipts). This will make the sound financial management of your business more complicated and you will be more inclined to forget who owes you money or to whom you owe it.
Moreover, one of the major disadvantages to opting for this type of balance sheet management relates to shareholder remuneration. In effect, you will not be able to properly track advance or deposit transactions to the shareholder, nor taxable personal benefits. This will make it difficult to determine the shareholder's remuneration and could cause you serious problems in the event of a tax audit.
In conclusion on tax returns
Filing your T2 and CO-17 corporate tax returns is no easy task, especially when it comes to preparing the balance sheet. It is essential for each company to properly fill out its accounting documents to ensure the company’s sustainability and avoid encountering any problem during tax audits. To this end, it is strongly recommended that companies contact a professional accountant who will likely provide a pre-made spreadsheet or use accounting software.
If you would like information about your tax return or how to prepare a balance sheet, contact the T2inc team today. We will answer all your questions.
You should also know that our team is currently working on creating a comprehensive course to help with your business accounting. We hope to make it available by the end of 2018.