Have you recently started a business and been selling products or services for a few months? Have you started charging customers (*1)? Next comes the time of year that most entrepreneurs dread—tax season (*2).
Being in business is much more complex than simply being an employee and requires a certain amount of expertise. Every entrepreneur is required to maintain accounting records and produce financial statements each year. Revenu Québec and the Canada Revenue Agency have the right to examine a company’s financial statements and accounting records at any time.
In order to better understand and prepare for your tax obligations, find out more about the particulars of corporate financial statements in Canada.
- What are corporate financial statements?
- What are consolidated financial statements?
- Solutions for filing business taxes in Montreal
What are corporate financial statements?
A corporate financial statement consists of an income statement or balance sheet. In addition to being an administrative necessity, it provides essential data on the company’s financial health.
Financial statement definition
Simply put, a corporate financial statement is an annual statement of account. It is an accounting document that contains extensive information about the company, including its performance, structure, assets and profitability. The document is intended for stakeholders such as investors, employees, shareholders and banks. Here are the main components of a corporate financial statement:
- Income statements
- Balance sheet
- Retained earnings statements
- Financial statement notes
- Cash flow statements
Like the chart of accounts and the trial balance, both the income statement and the balance sheet are made up of five different types of bookkeeping accounts:
- Equity and retained earnings
A company’s income statement
The income statement is one of the most important components of a corporate financial statement. It includes income and expense accounts and demonstrates the company’s profitability over a given period of time.
The income account includes information such as sales, rental income and investment income. It takes interest, dividends and capital gains into account.
The expense account includes information such as purchases, payments to subcontractors and employees, rental fees, and travel and entertainment expenses.
Calculating the income statement
Calculating the income statement is fairly simple—it consists of subtracting the company’s expenses from its income. The statement indicates the amount of income/sales made over the course of the year as well as all of the expenses incurred. After the expenses are deducted, you can determine the profits made or losses incurred over the course of the fiscal year. Note that the income statement is reset every fiscal year.
The purpose of an income statement is to provide information on the profits the company has earned through its business activities—the profits it will have to pay taxes on.
The balance sheet in a corporate financial statement
Another essential component of a corporate financial statement is the balance sheet, which lists all of the company’s assets, debts and equity at a given time to determine its net worth.
Like a personal balance sheet, a corporate balance sheet provides a snapshot of a company’s financial health at a given date. On December 31, the company can assess its assets and liabilities (debts) to determine its value.
This component of a corporate financial statement is made up of several bookkeeping accounts, including assets, liabilities, equity and retained earnings.
Balance sheet assets
This category includes current assets (cash, accounts receivable, inventory and prepaid expenses) and capital assets (computer equipment, office equipment, cars, buildings).
Balance sheet liabilities
This category includes current liabilities (accounts payable, credit card debt, lines of credit, expenses, taxes payable and current portion of long-term debt) and long-term liabilities (bank debt and notes payable). In short, it lists everything a company owes.
The equity account lists information about shareholder equity, including common and preferred shares and retained earnings.
Calculating the balance sheet
When calculating the balance sheet, the sum of the assets should equal the sum of the liabilities and the equity and retained earnings. The accounts should always be balanced.
The difference and relationship between the income statement and the balance sheet
As mentioned above, the income statement details a company’s profits or losses over a given period. The document is not associated with a particular date, but rather corresponds to a defined period of time (e.g. January 1 to December 31 of a given year).
Conversely, the balance sheet is a snapshot of a company’s financial health on a given date (e.g. when preparing the financial results for December 31).
The income statement in a corporate financial statement must be reset at the end of each given period. To do so, the amount in the “profit for the year” account must be transferred to the “retained earnings” account on the balance sheet at the end of each period.
Concrete example of a corporate financial statement in Canada
To better illustrate the function and importance of the income statement and balance sheet, two fundamental components of a corporate financial statement, let’s take a look at a simple example.
Let’s say that a company has made a profit of $10 in its first year and a profit of $20 in its second year. At the end of the second year, the company’s financial statement will look something like this:
Company income statement
- Sales: $30
- Salaries: $5
- Office expenses: $5
Profit = $20
Company balance sheet
- Bank account balance: $40
- Accounts receivable: $6
Total assets: $46
- Accounts payable: $10
- Taxes payable: $5
Equity and retained earnings:
- Common shares: $1
- Retained earnings at the beginning of the year: $10
- Net profit for the year: $20
Total liabilities + equity and retained earnings: $46
Conclusion of the example
We can see that the profit recorded in the income statement corresponds to the company’s income minus its expenses. It is then recorded in the balance sheet as “net profit for the year”. Furthermore, the sum of the assets on the balance sheet is equal to the sum of the liabilities and the equity and retained earnings.
It’s important to understand that the balance sheet remains ongoing year after year. It does not reset like the income statement does. A company's closing balance sheet for a fiscal year is always used as the opening balance sheet for the following year.
Conclusion on corporate financial statements
It’s vital for entrepreneurs to keep their accounts up to date. This includes preparing corporate financial statements.
By doing so, you will be well prepared in the event of an audit, and you will gain a global overview of your company’s finances, including its real value and profits.
What are consolidated financial statements?
When a company owns multiple businesses, it can compile a consolidated financial statement for taxation purposes. However, there are specific rules that must be followed in order to consolidate the data properly, and not all types of companies can do so.
Consolidated financial statement definition
A consolidated financial statement is a compilation of the financial statements of multiple companies.
It provides an economic overview of the group’s activities, income, assets and liabilities and accurately reflects the performance, financial health and cash flow of each company being analyzed.
When are consolidated financial statements used?
In most cases, groups of companies composed of a parent company and its subsidiaries are the ones that produce consolidated financial statements. In such groups, the parent company directly or indirectly controls the other companies in the group, often through voting rights. That means that it has significant influence over its subsidiaries’ financial policies.
As such, it is advisable for parent companies to have their corporate accountant produce consolidated financial statements that reflect the economic situation of the group as a whole. They can produce documents that present the parent company and its subsidiaries as a single entity, including a consolidated balance sheet, a consolidated income statement and a consolidated statement of changes in a financial position.
How to integrate one or more subsidiaries into consolidated financial statements
When a parent company owns more than 50% of a business, it can consolidate its financial statements with those of its subsidiaries using a process called “full consolidation”.
Cash, accounts receivable, inventory and the rest of the subsidiaries’ current and long-term assets are included in the parent company’s balance sheet. Similarly, taxes payable, debts (apart from intra-group debts) and bank loans are also included in the parent’ company’s liabilities.
When producing consolidated financial statements, any debt owed or income earned within the group must be eliminated, because a company cannot owe itself money. Transactions between companies in the same group must therefore be largely neutralized.
The accountant will need to report the parent company’s dividends under the item “dividends payable”. They should also make sure to include the portion of the subsidiary’s net assets held by shareholders that do not belong to the group of companies under the item “non-controlling interest”.
The advantages of consolidated financial statements
For a group of companies, using consolidated financial statements is advantageous in several ways.
They provide an accurate overview of the entire group’s tax situation, activities, income, assets, liabilities and cash flow. Furthermore, consolidated financial statements can help groups of companies homogenize their accounting practices.
Solutions for filing business taxes in Montreal
Filing taxes requires precision and can be a huge source of stress for entrepreneurs and individuals alike. Accounting professionals and software are available to facilitate the process, but it can be difficult to know which solution is best for you.
Firms that specialize in tax returns
Despite recent technological advances, every tax season sees a significant number of businesspeople turn to reputable accounting firms to handle their company’s tax returns.
It can be reassuring to have something as important as filing taxes taken care of by a real person rather than computer software. A good accountant will often find a way to save you money on your corporate tax return. But this traditional solution for filing taxes in compliance with the standards set by the different levels of government comes with disadvantages as well. Considering that, it’s legitimate to ask oneself the following question:
Is using an accounting expert the best solution for your business?
- Leadership may be reluctant to divulge their company’s revenue and expenses to professionals who have no connection with the organization.
- Using an accountant means finding one, going to see them, giving them the relevant information and going back to their office once the process is complete. It requires a certain amount of time, which some business owners might find irritating.
- While many accountants are very skilled, you always run the risk of ending up with a less conscientious accountant who may cause you to miss out on opportunities to save on your tax return.
It’s important to carefully consider the pros and cons before deciding to hire a professional accounting firm to handle your company’s taxes.
Specialized tax accounting software
Tax software is a solution that has been gaining popularity for several years. It’s a simple, cost-effective way to file your business taxes independently. All you need to do is enter the required information into the system, and it will automatically carry out the calculations needed to complete your tax return.
In addition to being free of human error, accounting software usually costs less than hiring a professional accountant to handle your business taxes.
However, using this solution to file your business taxes comes with its own risks and drawbacks:
- Tax software isn’t guaranteed to be a perfect fit for your business. You will most likely have to settle for the software that comes the closest, as opposed to getting customized services from accounting professionals.
- Tax software can be complicated to use if you have no previous experience with it.
- Calibrating the software can be complex and time-consuming. The parameters need to be set correctly in order to produce the most accurate tax return for your business.
T2inc: the hybrid solution for filing your taxes in Montreal and throughout Quebec
At T2inc, we offer the best of both worlds. We offer a service that enables you to file your corporate tax returns yourself online, with our experienced tax accountants on hand to help at any time. In addition to being conscientious and discreet, our professionals are recognized by the Quebec CPA Order.
With our extensive expertise in the field of corporate taxation, T2inc offers the convenience and practicality of using software to file your company's tax returns while providing you with the peace of mind that comes from working with a seasoned business tax specialist.
Whether you are located in Montreal or elsewhere in Quebec, you can trust us to handle your company’s tax returns with diligence and professionalism. Our teams are available to answer any questions you have.
Notes on financial statements
*1: If you have billed customers and earned $30,000 or more in revenue over a period of 12 consecutive months, regardless of the period, you must register for the GST/QST. To do so, you must request tax numbers from Revenu Québec if you are in Québec or from the Canada Revenue Agency if you are located outside the province.
*2: If you are doing business under your own name as a self-employed worker, sole proprietorship or partnership, you will file your business taxes at the same time as your personal ones. All you will need to do is fill out the additional appendices that are attached to your personal income tax return. The form numbers are T2125 for federal taxes and TP-80 for provincial taxes. Self-employed workers must pay their taxes by April 30, like other individuals, but they have until June 15 to file their T1 tax return.
If you are doing business as a corporation, also known as a corporate entity or an incorporated company, you have six months after the end of your fiscal year to file your taxes. For example, if you became incorporated on April 15 and chose March 31 as the end of your fiscal year, you have until September 30 to file your T2 and CO-17 corporate income tax returns.