How to prepare financial statements for filing T2 and CO-17 corporate income tax returns

Corporations have year-round expenses to operate their business. These expenses commonly include the acquisition and use of a corporate vehicle. These investments offer many tax benefits for incorporated companies, but they also imply certain obligations. A business entity of this type must also produce a financial balance sheet in addition to the income statement.

Find out what requirements corporations have to meet for filing T2 tax return and CO-17 corporate income tax returns.

Accounting obligations of a corporation

Running a corporation involves additional tax obligations that aren't necessarily applicable to a self-employed person. A self-employed person can complete an income statement by keeping an up-to-date record of income, expenses, payable and receivable accounts by filling out the T1 tax form. This is relatively simple and can be done on an Excel spreadsheet or paper.

Corporations must keep these records to balance all their bank accounts, credit cards, lines of credit, loans, advances to shareholders, tax accounts, etc. Then there is the need to complete a full financial report. This is much more complex to do alone and requires more work and accounting expertise.

A corporation must keep a complete accounting of its business activities to file its income tax returns, requiring credit and debit records. The idea is that for each accounting entry or transaction, two managers simultaneously maintain the two accounts: one for debit and the other for credit.

This type of management can be complicated and we often recommend that entrepreneurs who are shareholders of corporations use accounting software to simplify the understanding and handling of their accounts.

Corporate tax return filing obligations

Corporations in Quebec are required to file an income tax return. The federal government requires a corporation to comply with this rule if during the year it was in one of the following five situations.     

Firstly, a corporation must file an income tax return if it had an office in the province at a given time. Secondly, any insurance corporation exercising any of the rights or powers of a corporation in Quebec, carrying on any business in Quebec, owning any property in Quebec, or having an office in Quebec, must also file a corporate income tax return.

Thirdly, a corporation must also comply with this obligation if it has disposed of a Quebec taxable property without having an office in Quebec and without being a resident in Canada. Fourthly and fifthly, if the corporation acted as an agent or trustee or subject to a special tax, it must file a tax return.

Deadlines for filing your business tax return

A company doesn't just have to file a tax return. It also has to make sure it does so on time. So what's the deadline for filing corporate taxes? The return must be filed within six months of the end of the fiscal year.

Then, if there's a balance due, it must be paid within two months of the end of the fiscal year, with a few exceptions. This applies to both the provincial and federal levels.

What if your company went bankrupt during the year?

The fact that a corporation has gone bankrupt does not mean that it must not file a tax return. Any corporation that declares bankruptcy during a tax year must file two tax returns for the applicable period. One tax return must be filed for the period beginning on the first day of the taxation year and ending on the day before the date of bankruptcy. The second tax return is for the period beginning on the date of bankruptcy and ending at the end of the taxation year.

Filing your tax returns

An Incorporated company must file its federal T2 and Quebec CO-17 corporate income tax returns every year. The company must prepare an accounting document of its financial reports, including the income statement and the balance sheet.

1 - Income statement

The income statement is an essential component of the financial statement and consists of all the company's revenues and expenses. This accounting document is mandatory for filing your income tax return.

When completing your company's income statement, it is important not to include taxes in your totals. For example, if you just made a sale of $1000 + taxes, for a total of $1149.98, you should only enter the $1000 in the sales account.

You are required to submit these taxes to the government. If your sales are $30,000 or more in any 12-month consecutive period, you are required to register for GST/QST.

You must include revenue from invoices that have not yet been paid in the financial statements, with some rare exceptions like farming, mining or fishing. Likewise, you must include invoiced expenses, even if they have not yet been paid.

It is also essential to distinguish between the different sources of income, as their taxation methods differ. Here are some examples of the main sources of income:

• Sales (revenue from your business activities)
• Loan or investment interest income
• Dividend income from investment income
• Capital gain income
• Rental income
• Dividend income from a related company

But for most small and medium-sized businesses, all income comes from sales. There is no need to spend time identifying the source.

In terms of expenses, here are some important points to note:

• Try to keep your expenses divided into categories. This will help you to classify them on your tax returns.
• It is important to differentiate your expense categories to include all restaurant, bar, and customer gift expenses, as they are treated differently in terms of taxation.
• The same applies to penalties and interest for late payment of taxes or other problems with the tax authorities.
• Any purchase of computer equipment, office equipment, car, building, or any other capital asset that is not used in a single year should not be included in the income statement expenses but rather in the asset accounts of the balance sheet. They will be depreciated over several years according to the tax category prescribed in the tax returns.

To determine the revenues for your income statement, you must add up all your revenues (by category of revenue sources) and exclude taxes from this calculation. The same principle applies to expenses. You must add all your expenses by expense category, excluding taxes, and add this data to the income statement.

2 - Balance sheet

The balance sheet is another integral component of a company's financial statement and is essential for your income tax return. It consists of a list of all company assets and liabilities. This accounting document is more complex and technically challenging to complete. We recommend using accounting software or an Excel spreadsheet to avoid errors when preparing your income tax return.

The balance sheet includes three types of accounts: assets, liabilities, equity and retained earnings. When drawing up a balance sheet, the sum of the asset accounts must be equal to the sum of the liability accounts plus the equity and retained earnings accounts.

Some people decide to create a balance sheet using only shortcuts, entering amounts for the bank account, accounts receivable, accounts payable, taxes payable, and amounts for capital stock and retained earnings. Remember that for the included earnings section, you must have at least two accounts:

• Retained earnings from previous years are the total retained earnings from last year's balance sheet
• Net income for the year represents the profit or loss from the statement of operations for the current fiscal year

Many entrepreneurs, and even some accountants, work this way to prepare their balance sheets. There are several reasons why this method is not recommended.

This method does not provide a complete accounting record and bookkeeping. It is easy to overlook many transactions that may have significant impacts (expenses, revenues, deposits or receipts). This will complicate your company's financial management and you will be more likely to forget who owes you money or vice versa.

One of the significant disadvantages of opting for this type of balance sheet management is in the area of shareholder remuneration. You will not correctly track the transactions of loans or deposits to the shareholder, nor the personal taxable benefits. This makes it difficult to determine the shareholder's compensation and could cause serious problems in the case of a tax audit.     

Filling a T2 tax return

Many types of organizations in Canada are required to file a tax return. Here are some tips to make your corporation's T2 tax return easier.

Who needs to file a T2 tax return?

The T2 tax return is a mandatory tax return for each tax year. This return must be completed for all individuals who operate a corporation or an incorporated company. If you own a business registered in your name, you must complete the business section of your T1 tax return.

Tax-exempt corporations, incentive corporations, and non-profit organizations must also file this type of return. Whether you have to pay taxes or not, you must file a T2.

Your company's tax year

To file the T2 form, you must determine the fiscal year when you incorporate a new corporation. If you are a professional corporation associated with a partnership operating in Canada, you must select December 31 as your fiscal year end.

Otherwise, you can choose any date you wish. On your first return, select the incorporation date of your corporation as the start of the tax year. For future T2 tax returns, your start date will be the day after your fiscal year-end.

When to file a T2 tax return to avoid penalties

The Canada Revenue Agency and Revenu Québec require your T2 tax return after the end of your fiscal year. You have 6 months to file your corporation's T2 tax return. Failing to do so may result in severe penalties.     

The penalty for a resident corporation is 5% of unpaid taxes plus 1% of due taxes for each additional month of delay. For non-resident corporations, it is $100 or $25 per day late, to a maximum of 100 days, whichever is greater.

How to fill out a T2 tax return

To file your T2 tax return, you can complete the document in paper format and mail it to your tax institutions. You can use NETFILE-accredited online tax services software or hire professional tax accountants. With T2inc.ca's services, you can take advantage of both options: the speed and reliability of T2 tax return software and tax accountant reports.

Filing your CO-17 tax return

Knowing how to complete your CO-17 tax return correctly is not easy for everyone. The CO-17 tax return contains many items that must be completed to avoid errors.

That is why businesses and companies frequently rely on experts in taxation and accounting. With the help of these specialists, companies can be sure of not making any mistakes.

Indicate the correct tax year on your CO -17 tax returns      

When starting a business, we recommend using the date of incorporation as a benchmark for the first CO-17 tax return. That way, in the following year, the next tax date will follow the end date (within one day). If you want to change your tax date, you can apply to your local tax office, stating the reasons for the change.

Indicate your company's correct address

This is one of the most common mistakes made when filing taxes. It's related to changing address without notice. Not advising the Canada Revenue Agency (CRA) could interrupt refunds.

Don't throw anything away

Keep your old tax returns, as well as any receipts and invoices that may be requested after your CO-17 tax return revision. Save these documents for up to 7 years after filing your CO-17 tax return and use them as supporting documents. These documents may be helpful in future refunds, like moving expenses.

Why a tax specialist is important for filing tax returns

Quebec's taxation system for companies is becoming increasingly complex. When you deal with a tax specialist in Quebec, you are sure to pay the right amount of tax and not a cent more.

No missed deadlines

Tax professionals are experts. Their work is regulated by the various tax deadlines and filing schedules. You will never again get caught in the middle of having to rush your reports when you hire a tax professional. You will also avoid late penalties and high-interest charges by government tax authorities.

Dealing with more complex financial issues

A tax specialist is the right person to entrust with your tax returns when your company's tax situation has changed many times over the past year. Have you opened a second branch? Did your sales increase unexpectedly and you are unsure which tax bracket you fall under? Did you incorporate your business during the year? Being assisted by a tax specialist for small and medium-sized businesses in Quebec will give you a clearer picture.     

Simplified communications with Revenu Québec

Dealing with Revenu Québec can sometimes be a bit of a challenge. A tax specialist can quickly resolve your issues and allow you to minimize your communications with Revenu Québec without worrying about making errors.

A tax specialist saves you time

As the saying goes, "time is money." Those in business know there is never enough time to complete all the work that a Quebec company requires. Using a tax specialist will save you the time you desperately need to keep your business running.

Tax specialists are professionals. Let them handle your tax returns so you can concentrate on other things.     

Hiring a tax specialist reduces the risk of error and unintentional fraud

Anyone who dealt with Revenue Quebec over an error related to their taxes knows how frustrating it can be. You can file your tax return alone, but the risk of making mistakes is high if you don't know much about taxation. Call a tax specialist if you don't want to risk being accused of fraud due to a simple typing error or lack of system knowledge.

Summing up filing your income tax returns

Filing T2 and CO-17 corporate income tax returns is not easy, especially when it comes to preparing the balance sheet. Every company needs to complete its accounting documents correctly to ensure its future and avoid any problems during tax audits. It is strongly advised that joint-stock companies hire a professional accountant to prepare these documents in a spreadsheet or using accounting software.

If you want to get more information on your tax return or prepare a balance sheet, contact the T2inc.ca team without further delay. We will answer all your questions.