Filing corporate taxes for your business in Canada can be a daunting task. With the ever-changing tax laws and regulations, it’s important to stay on top of filing your corporate taxes correctly and on time. Whether you are a small business owner or an established corporation, understanding Canadian corporate tax law is essential for staying compliant with the Canada Revenue Agency (CRA) guidelines.
In this blog post, we will provide an overview of filing corporate income taxes in Canada as well as tips to help make the process easier. We’ll cover topics on whether you need to file, when you need to file and pay, what information you need to file, and whether you can file your own corporate income tax return. So let’s get started!
Do You Need to File a Corporation Income Tax Return?
All Canadian resident corporations are required to submit a corporate income tax return (T2) once a year, regardless of whether they owe any taxes or not. This requirement applies to various entities, including for-profit, non-profit, tax-exempt, and inactive or dormant corporations.
Non-resident Canadian corporations are also obligated to file a tax return if, at any point during the year, they operated an incorporated business in Canada, had a capital gain or sold a Canadian property subject to tax. The filing requirement still applies even if the company claims that the profits and gains earned are exempt from Canadian income tax due to a tax treaty.
When Do You Need to File a Corporation Income Tax Return?
A corporate tax return (T2) must be filed within six months after the end of the tax year. The tax year is usually defined as the fiscal period for the company. If your company’s tax year ends on the last day of a month, you must file the corporate tax return on the last day of the sixth month following the end of the tax year. If it ends in the middle of a month, you must file it on the same day of the sixth month following the end of the tax year.
Here are a few examples to illustrate:
- If the business year-end is February 28, the corporate tax filing deadline is August 31
- If the business year-end is May 31, the corporate tax filing deadline is November 30
- If the business year-end is June 14, the corporate tax filing deadline is December 14
Additionally, if a filing due date falls on a weekend or public holiday, the tax return will be considered filed on time as long as the Canada Revenue Agency receives it or is postmarked by the next business day. As such, it is crucial to keep track of when your company’s tax year end and plan accordingly to ensure that the tax return is filed within the required timeframe.
When Do You Need to Pay Corporate Taxes?
In most cases, corporations with taxes owing must pay their taxes within two months after the fiscal year has concluded. However, this timeline is extended to three months if certain conditions are met. Specifically, the corporation must be a Canadian-controlled private corporation (CCPC), and it must have claimed the small business deduction in the current or previous tax year. Additionally, the corporation’s taxable income in the previous tax year cannot exceed its $500,000 business limit (if it is not associated with other corporations), or the total of all associated corporations’ taxable income in the previous year cannot exceed their total business limits.
The Canada Revenue Agency also requires corporations to make tax instalments if the taxes owed during either of the two previous tax years exceeded $3,000. Tax instalments allow incorporated businesses to spread out their payments over the course of the year, avoiding the need to come up with a large sum of money when the corporate tax return is filed. It is important to note tax instalments are not just optional; they are required by the Canada Revenue Agency and can be enforced with instalment interest if they are not paid by the tax deadline.
What Information Do You Need to File a Corporation Income Tax Return?
Complete, accurate, and reconciled bookkeeping records are required to file the corporate tax return. It requires all business financial transactions for the fiscal period to be recorded and classified using double-entry bookkeeping.
Based on the completed and reconciled bookkeeping records, the following accounting reports are required to prepare and file a corporate income tax return:
- Trial Balance: It is a report that summarizes all individual accounts in a company’s ledger for a given reporting period. It is used to assess the accuracy of entries and ensure that the total amount of debits equals the total amount of credits.
- General Ledger: It is a comprehensive record of all financial activities of an incorporated business over a specific period, typically a fiscal year. It contains details for each transaction, including dates, descriptions, name of customer or supplier, sales tax, and debit or credit amount.
- Bank and credit card reconciliation: It is a report to verify the accuracy of transaction data for each business bank and credit card account. It ensures all transactions have been properly recorded, no transactions have been unintentionally left out, and there are no duplicate entries. Reconciliation reports help to guarantee that all financial data are complete and up to date.
- Accounts Receivable aging report: It provides an in-depth snapshot of the total amount a customer owes to your company at the end of the fiscal year. This report includes details on how long each unpaid invoice has been outstanding, as well as other information such as the original due date for payment, discounts given, and the amount still owed.
- Accounts Payable aging report: It shows a comprehensive overview of the outstanding payments owed to vendors and suppliers as of the year-end date. It includes key information such as the amount due, amount paid, outstanding balance, and the due date for each invoice.
- Fixed Asset continuity schedule: It provides an overview of all capital assets previously purchased by the company, and the cumulative depreciation taken for each type of asset.
In addition, incorporated businesses are legally obligated to keep tax records for six years of all financial transactions performed. This includes tracking income, expenses, asset purchases/sales, and other associated costs.
What Tax Forms and Schedules Need to be Completed?
Filing your corporate taxes is far from a simple process to meet all the requirements set forth by the Canada Revenue Agency (CRA). In addition to completing the T2 (Schedule 200), you must submit various “schedules” to satisfy your corporation’s tax filing obligations. These schedules are used to provide additional information about your company’s tax return.
The types of schedules a company needs to complete depend on the specifics of its business. Here are some of the most commonly used tax forms and schedules for a corporation:
Schedule 100 – Balance Sheet Information uses the General Index of Financial Information (GIFI) to organize the corporation’s financial information, such as assets, liabilities, retained earnings, and shareholders’ equity. It is a mandatory form that must be filled out. If the Balance Sheet is not balanced upon filing, it may lead to potential tax audits from the Canada Revenue Agency.
Schedule 125 – Income Statement Information also uses the General Index of Financial Information (GIFI) to provide a detailed breakdown of revenue and expenses for the corporation. It is also a required schedule that must be completed and filed with the tax return.
Schedule 141 – Notes Checklist is a comprehensive questionnaire used to assess the degree of involvement of the financial statement preparer, and to identify the type of information included in the notes accompanying the statements. It also informs the Canada Revenue Agency about the accountant’s qualifications who prepared the financial statements and their involvement in the business.
Schedule 1 – Net Income (Loss) for Income Tax Purposes is an essential form that must be completed in most circumstances when filing a corporate tax return. This form is necessary to reconcile the accounting profit and the taxable income, which are sometimes different because Canadian tax laws require adjustments on certain income and expenses to calculate taxable income.
Schedule 3 – Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculations sounds daunting and complex, but it is relatively straightforward. This form is only required if the business has paid dividends to its shareholders or received dividends from other corporations.
Schedule 4 – Corporation Loss Continuity and Application is used to accurately compute the company’s losses throughout its existence, both in terms of capital losses and non-capital losses. It also details any possible means for a corporation to recoup these losses through a carryback to earlier periods, or offsetting current year profits with prior year losses. It is not always required, as the filing requirements depend on the corporation’s specific circumstances.
Schedule 8 – Capital Cost Allowance (CCA) is a schedule which enables businesses to accurately calculate tax depreciation of the capital assets based on the asset class. CCA offsets taxable income to reduce the corporation’s overall tax payable.
Schedule 50 – Shareholder Information is a form that private corporations must fill out where a single shareholder holds 10% or more of the common or preferred shares. It discloses up to 10 shareholders’ legal names, Social Insurance Number (SIN) or Business Number (BN), and percentage of ownership.
Can You File Your Own Corporate Tax Return?
As an incorporated business owner, you may be curious to know if you can prepare and file your corporate taxes in Canada without the help of an accountant or similar professional. The answer is yes; you can prepare and file the corporate income tax return without an accountant. The main incentive for doing this is to save money on the costs of accounting services.
However, there are risks associated with this approach. Unlike personal income tax return, which is relatively straightforward and can be prepared without the appropriate accounting credentials, corporate taxes are much more complex. If you attempt to file your corporate tax return without proper knowledge and prior experience, it may lead to costly mistakes resulting in unwarranted penalties and interest. Some of the most common errors are: missed deductions, claiming ineligible expenses, overstating income, improper allocation between gross amounts and sales tax, and inaccurate accounting records. Any one of these errors could also result in higher tax payable and potential CRA audits.
Having said that, if you have a strong accounting background and familiarity with the Income Tax Act, it will make sense for you to prepare and file your own corporate tax return. Just make sure you stay on top of all new tax regulations, such as the Underused Housing Tax filing and payment requirement for affected owners who own a residential property on or after December 31, 2022.
Filing corporate taxes in Canada can be complicated, but it doesn’t have to be. By understanding the rules and regulations, as well as taking advantage of all deductions and credits available, you’ll save yourself time and money when filing your small business taxes. With the right approach and advice from an experienced accountant, you will ensure that all necessary information is reported accurately while maximizing savings for your company.