April – the traditional time when the stress level of all public accountants is at a high due to the due date of most personal tax returns. And fortunately or unfortunately, since the 30th of April is falling on a Saturday this year (2022), we actually have until May 2nd to get the personal tax returns filed.
But on its heels is generally the looming deadline for many corporate tax return deadlines. If you have a December 31st year-end, your corporate tax returns are due on June 30th.
In preparation for this season, I thought that I would create a short summary of a corporate tax return to demystify what is in it. The main part of the tax return that determines how much tax your company owes is within the T2 Jacket (the 1st 9 pages of your corporate tax return). These pages tell the Canada Revenue Agency (CRA) some general information about your company, your taxable income, and then the taxes that you owe, and who in the company is responsible for paying these taxes.
The First Part of Your Canadian Corporate Tax Return
The first page of your corporate tax return has your CRA business number, the name of your corporation, where that company is located, the tax year that you are reporting on, and the classification of your company. A common box that is checked for my clients is that they are a Canadian Controlled Private Corporation (CCPC). The type of corporation will determine your corporate tax rate.
In BC, if you are a CCPC and have a taxable income of under $500,000, your corporate tax rate will be 11%. If you earn more than $500,000 or are not a CCPC, your corporate tax rate will be 27%.
The next two pages outline for the CRA what types of activities have occurred in your business for the year. Are you claiming specific tax credits (eg. SR&ED), do you have any capital assets (CCA), is there a reason why your accounting income differs from your taxable income (Meals & Entertainment), and do you have any foreign assets?
Page 3 of Your Canadian Corporate Tax Return
Page 3 takes the amount of your Net Income for Tax Purposes and will adjust it to get to your Taxable income. After this page, the remainder of the return is the calculation of how much tax your company owes.
Your Tax Amount Could Vary
There are a number of reasons why a straight 11% may not be applicable for a CCPC with a taxable income of under $500,000. When you get to page 9 of the T2 Jacket and see an amount on Line 770 that is different from your combined federal and provincial tax rate, ask your accountant to explain why there is a difference. Some of my clients have some investments in their company that generate dividend income. As a result of this, they may have to pay a separate tax called Part IV, which is effectively a prepayment of future taxes. This would be a reason why the tax rate differs from a BC rate of 11% as the Part IV tax rate is higher than 11%.
Other common forms/schedules that you will see in your corporate return are the General Index of Financial Information (GIFI), Schedule 1, Schedule 3, Schedule 8, and Schedule 50.
Everything You Need to Know About GIFI
Many, MANY, years ago, tax preparers just filed a copy of the financial statements with the tax return. However, since the electronic filing has been in place, a separate set of financial statements is not required. They are embedded into the return. The information should look very similar to the set of financial statements that your account provides you with or it should mirror what your Accounting Software produces as internal financial statements.
A Tip For Your Internal Financial Statements
The closer that the internal financial statements can match the GIFI information, the easier it will be for you to provide information to the CRA that is easy for them to follow. If you are doing a number of entries that reclass some of the accounts, or have neglected to post the year-end entries, you may want to consider aligning the two financial reports.
Schedule 1 – Net Income (Loss) for Income Tax Purposes
The information in the GIFI provides the starting point for your taxable income for the year. It takes the accounting net income number and will use this information on the Schedule 1 which will start to make adjustments that are required for tax purposes, that will allow you to arrive at your taxable income number.
This is where adjustments are made for the 50% limitation on Meals & Entertainment expenses, and where adjustments are made to remove the book amortization that is being recognized on your capital assets and replace it with the allowed Capital Cost Allowance amount.
At the bottom of this schedule, you will get your Net Income for Tax purposes (still not taxable income). The taxable income number is determined after this. In order to arrive at your taxable income number, there are a few common adjustments. Charitable donations are realized here, as are the application of any non-capital losses from the previous year or capital losses from previous years. After these deductions are applied, you have arrived at your taxable income. This number is now where the tax rate is applied. There are a few more pages in your tax return that will map out and will show you how the tax rates are applied.
Schedule 3 – Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculation
This is the form that will disclose if you have paid any dividends to the shareholders during your fiscal period. If you have received dividends from your company, you will see that amount reported in this form. If your company has also received any dividends in the year, this is where you will also see this information being disclosed.
Schedule 8 – Capital Cost Allowance
This form outlines what capital assets your business has and determines how much CCA your company can take as a deduction for the use of the assets during the year. This replaces any book amortization that you have booked in your financial records for internal purposes.
Schedule 50 – Shareholder Information
Another disclosure tax form or schedule that you will see as part of your Canadian corporate tax return is Schedule 50: Shareholder Information. If you are a privately held company and the shareholders own more than 10% of the company, you will need to disclose who the shareholders are and how much of the company they may own.
So that is my quick and dirty summary of a typical small business corporate tax return for a Canadian company. I’ve done my best to not over-simplify it, but at the same time, the purpose was to provide new business owners some knowledge about their corporate tax returns. And hopefully, the whole tax compliance won’t seem as intimidating.
Dayna Holland, CPA, CA (she/her)
CEO of Dayna Holland Ltd.
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