What you need to know for your first corporate tax return in Canada

Incorporating a corporation marks the beginning of an exciting journey into the world of business. It also marks the beginning of certain tax obligations that your business, whether active or not, will have to comply with. This is especially true for your first tax period under a new legal status.

In this article, we'll walk you through the key points you need to know for your first T2 tax return in Canada, providing you with clear and practical information.

When should you first report your business income?

When you incorporate your company, the fiscal year of the first year cannot exceed 371 days. Contrary to what you might think, the date of incorporation and this 371-day period do not necessarily determine the final date of your fiscal year-end.

In fact, the official date of your fiscal year-end depends primarily on the date on which you file your first corporate tax return. Once your corporate tax return has been filed with the relevant authorities, this period, and not the period of your incorporation, will be used for your subsequent fiscal year-ends.

Fictitious example of ABC Inc. for its first tax return

Let's take the example of a newly incorporated corporation in Canada, which we'll call ABC Inc. Having been incorporated on January 1, 2024, ABC Inc. has 371 days + 6 months to file its first tax return.

ABC Inc. decides to file on July 1, 2024, rather than wait until the end of its first year of existence after incorporation to start filing. By electing this date, ABC Inc. officially adopts August 1 as its fiscal year end for its future returns.

This election allows ABC Inc. to file its return when professional tax accountants are more available, which can reduce the costs associated with accounting services and give it greater flexibility to optimize its tax strategy.

If you'd like to learn more about this topic, read our article on the benefits of choosing the right tax year-end for newly incorporated companies.

What documents do I need to file my corporate tax return?

For your first corporate tax return, you'll need to submit certain key documents to file your T2 tax return.

Some of the most important documents include Schedule I125 to complete the income statement, Schedule I100 to complete the balance sheet, Schedule I101 for the opening balance sheet, and Schedule 24 for newly incorporated companies.

Schedule I125 - T2SCH125: Profit and loss information

The T2SCH125 form is essential for providing income statement information that includes your company's income and expenses during the fiscal year.

It allows you to detail income from various sources, as well as deductible expenses such as salaries, overhead, and business related expenses. We encourage you to properly document and report all eligible expenses to maximize your tax deductions and reduce your taxable income.

If the company has more expenses than income in the first year, the company may be able to offset non-capital losses against future income.

Schedule I100 - T2SCH100: Balance Sheet Information

T2SCH100 Balance Sheet Information provides an overview of your company's assets, liabilities, and equity at the end of the fiscal year.

It provides details of assets such as cash, property and equipment, as well as the company's debts and liabilities. By using the information provided on Schedule I-100, you can not only better understand your financial situation, but also develop strategies to optimize your company's tax position and maximize profitability.

Schedule I101 - T2SCH101: Opening Balance Sheet Information

Schedule I101 is used to report your company's assets, liabilities, and equity at the beginning of the fiscal year. This provides a basis for tracking financial movements throughout the year.

Schedule 24 - T2SCH24: Newly Formed Companies

Schedule 24 is specifically designed for newly incorporated companies. It allows you to report the type of company and/or items on the first return after a merger or liquidation of one or more subsidiaries.

Mistakes not to make: declare your income even before you start doing business

One of the most common mistakes made by newly incorporated companies is not declaring their income until they have started trading. However, it is important to understand that even a dormant company is obliged to fulfill its annual tax obligations as soon as it is incorporated.

Delaying filing until the year of commencement may result in the accumulation of multiple late filings and additional fees, which can prove costly. By filing an annual return, even if you have no income, you avoid unforeseen costs and ensure your company's compliance with the Canada Revenue Agency. What's more, you can accurately document your company's inactive status to avoid future tax 

To avoid this potentially crippling mistake for your business, we offer an online inactive corporation filing solution.

Rely on T2inc.ca for your first and every subsequent tax return!

Your company's first tax return is more than just an administrative procedure. Whether your business is active or not, this step represents a valuable opportunity to lay the foundation for sound and effective financial management. By relying on expert advice and ensuring that you meet deadlines and tax standards, you can not only successfully file your T2 or CO-17, but also set your business on the path to lasting financial success.

At T2inc.ca, we're here to guide you every step of the way, providing the expertise and support you need to excel in your entrepreneurial adventure. Our online business tax solution offers you a solution that's both simple and professional, yet cost-effective.

Don't wait any longer: contact our tax accountants today for a free quote and make sure your next business tax return is handled by experts.