Bookkeeping for a New CCPC: Share Capital and First-Year Setup

How should a new CCPC keep its books?

A new corporation must keep records and books of account in a form that lets its tax be worked out (Income Tax Act, section 230). A corporation incorporated under the federal Canada Business Corporations Act (CBCA) must also keep adequate accounting records. The corporation is a separate person from its owner, so its books must show its own money, shares and debts apart from the owner's.

This page cites the CBCA for share and corporate-record rules. A corporation incorporated under a provincial business corporations act follows that province's act for those points. The tax rules cited here apply to every Canadian-controlled private corporation (CCPC).

The case is not simple if any of these is true:

• Money moved before the books existed: a personal card paid corporate costs, or customers paid into a personal account.
• Shares were recorded as issued but nobody paid for them.
• Nobody can say whether the owner's deposits were share capital or a loan, or what the shareholder balance is.
• The business operated before the incorporation date.
• The corporation operates in Quebec or Alberta, or has an owner or a company in the US.
• A non-resident owner or foreign investor may control the corporation, which can end its CCPC status.

Gather these before touching the books:

• The certificate of incorporation and the articles
• The directors' resolution that issued the shares, and proof of payment for them
• Every bank and card statement since the incorporation date
• Receipts for costs the owner paid personally
• Any written loan agreement between the owner and the corporation

If money has already moved, see the last section before touching the books.

Single-entry or double-entry: which does an incorporated business need?

Neither the Income Tax Act nor the CBCA names either method, but a T2 needs a balance sheet, and double-entry books produce one as entries are made. The Income Tax Act asks for records in a form that lets the tax be determined, and the CRA's record-keeping page names no bookkeeping method.

The T2 sets the practical test. A T2 must include financial statement information using GIFI codes (the CRA's standard account numbers for a return): a balance sheet, an income statement and additional questions (CRA GIFI guide). A balance sheet carries share capital, shareholder balances and bank balances, which a list of income and expenses alone does not record. Treating double-entry as the practical choice is a conclusion, not a CRA rule. For software choices, see choosing accounting software.

How do I record the shares issued and the share capital?

A federal corporation issues a share only when the price is fully paid in money, property or past services (CBCA section 25). It keeps a separate stated capital account (the legal record of what shareholders paid in) for each class and series of shares and adds the full amount it receives for them (CBCA section 26). Some exchanges with related persons follow subsection 26(3) instead. When the owner moves property in for shares, a joint section 85 election can defer the owner's tax on it; it is due by the earliest income tax return filing deadline of either party for the transfer year (subsection 85(6)). Both are in books after incorporating a sole proprietorship.

In order:

1. The directors pass a resolution to issue the shares. The resolution goes in the minute book, the corporation's binder of resolutions and share records (Corporations Canada).
2. The shareholder pays in full.
3. The books record the payment as share capital of that class, and the securities register shows who holds the shares.

A promissory note or promise to pay from the person receiving the shares, or from someone not at arm's length with that person, does not count as property (subsection 25(5)). Shares "paid for" with such a promise do not meet section 25. Directors who vote for issuing shares for anything other than money are jointly liable to the corporation for any shortfall below the fair equivalent in money on the resolution date, unless they did not know and could not reasonably have known; an action must start within two years of the resolution (subsections 118(1), (6) and (7)).

Is the money I put in share capital or a shareholder loan?

Money is share capital only if the corporation issued shares for it. Money the corporation must pay back is a shareholder loan, recorded as an amount due to the shareholder.

No source sets a deadline for choosing. But share capital needs a share issue that follows payment, and a loan needs the corporation to owe the money back from the day it arrives. The books are easier to support when the choice is recorded the day the money moves: the resolution for shares, a short written note for a loan. A lender or buyer reading the balance sheet sees which of the two it is.

How do I record money I take out, and when does it become a taxable shareholder loan?

Money the owner takes out may be salary, a dividend, repayment of a loan the owner made, reimbursement of a corporate cost the owner paid, or an amount the owner owes the corporation. Whether an unlabeled withdrawal is a debt depends on the facts, including whether repayment is expected. Where it is not, it can be a benefit conferred on a shareholder, which subsection 15(1) includes in the shareholder's income. The books should record which it is when the money moves.

A loan to, or a debt owed by, a shareholder or a person connected with a shareholder (for example a relative) is included in that person's income for the year it was received (Income Tax Act, subsection 15(2)). A corporation resident in Canada that borrows is outside the rule. The amount is not included if it is repaid within one year after the end of the corporation's tax year in which the loan was made, and the repayment is not part of a series of loans or other transactions and repayments (subsection 15(2.6); the CRA's published view, not law, is in Folio S3-F1-C1).

Exceptions, deemed interest on low-interest loans and what happens when a taxed loan is repaid are in taxable shareholder loans.

Each entry has two sides. A debit adds to an asset or an expense and reduces a liability or equity; a credit does the reverse.

Cash taken out that is not salary, a dividend or a reimbursement can repay what the corporation owes the owner, up to that balance; the one-year rule applies to the excess. The substance of each payment decides, not the entry, and a set-off counts only if it legally discharges the loan (CRA Folio S3-F1-C1, paragraphs 1.14 and 1.82). Keep one account per shareholder, with the amounts owed to and by the owner on separate lines, so a net balance does not hide either debt. Agree each line to the bank statements at year-end. The full account is in the shareholder loan account. Salary and dividends are in salary or dividends.

Which bank account and records should the corporation use from day one?

Records are easiest to support when the corporation earns and spends through a bank account in its own name. No source requires a separate corporate account, but the law requires records that let the CRA work out the corporation's tax, and corporate money that passes through a personal account is hard to show from the corporation's own records.

Keep the proof behind every entry: invoices, receipts, bank and card statements, and any contract needed to understand an entry. Section 230 requires keeping every account and voucher needed to verify the records.

When a personal account or card pays a cost that is the corporation's, the corporation records the purchase as an expense, or as an asset for equipment and other capital outlays, and owes the owner the amount (Income Tax Act, paragraph 18(1)(b) bars deducting a capital outlay). When a corporate account pays a personal cost, it is not a business expense; it is recorded to the shareholder account, or as pay or a dividend if that is what it was. Neither payment is revenue for the corporation. See costs paid personally. CRA accounts, the business number and GST/HST registration are in after you incorporate. Steps common to any new business are in setting up the books.

How do I set up the accounts so the T2 comes out easily?

Give each account a GIFI code from the start. A T2 includes Schedule 100 (balance sheet), Schedule 125 (income statement) and Schedule 141 (additional information). In the first return, a new corporation completes two balance sheets: an opening one on Schedule 101 and a closing one on Schedule 100 (CRA GIFI guide). The first return after incorporation also includes Schedule 24, First-time Filer After Incorporation, Amalgamation or Winding-up of a Subsidiary into a Parent.

Keep the amounts due to and from each shareholder in their own accounts so they land on these lines.

Schedule 50 lists every shareholder who holds 10% or more of the corporation's common or preferred shares (CRA Schedule 50). The corporation's share ownership records must therefore show who holds what share of each class. A full account list is in chart of accounts for GIFI, and the statements themselves in year-end financial statements.

When is the first T2 due, and when is the tax due?

The T2 is due six months after the end of the tax year (CRA T2 guide). The tax balance is due two months after the year-end, or three months after it when all of these hold (Income Tax Act, subsection 248(1); CRA balance-due day):

• The corporation is a CCPC throughout the tax year.
• It claimed the small business deduction for the current or the previous tax year.
• Its taxable income for the previous tax year did not exceed its business limit for that year. If it is associated with other corporations, the test is instead whether their combined taxable income for their last tax years that ended in the last calendar year ending before the current year-end does not exceed their combined business limits.

These tests look at an earlier tax year. The statutory definition and the CRA page say nothing about a corporation in its first tax year, which has no earlier year, so the later date is not certain in a first year. Confirm which date applies before relying on it; paying by the earlier date removes the question.

A T2 is due for every tax year, including a year with no tax payable or no activity (CRA T2 guide). A CCPC generally must file it electronically; the exceptions include a corporation reporting in functional currency (Income Tax Act, subsection 150.1(2.1); Regulations, subsection 205.1(2)). Late-filing penalties and relief are in penalties, interest and relief. The year-end date is chosen in choosing a year-end.

Which records and minute-book items do I keep, and for how long?

A corporation keeps two sets: the corporate records (the minute book) and the accounting records.

Most records and books of account, with the vouchers behind them, are kept until six years after the end of the last tax year they relate to (Income Tax Act, subsection 230(4)). For a corporation, the minutes of directors' and shareholders' meetings, the share ownership records, the general ledger or other book of final entry and the special contracts behind it are kept until two years after the corporation is dissolved (Income Tax Regulations, section 5800). For a federal corporation, whoever is given custody of its documents and records also stays liable to produce them for six years from dissolution, unless a court sets a shorter period (CBCA subsection 225(1); Regulations, section 14.1). More detail is in how long to keep business records.

What changes in Quebec or Alberta?

A corporation located in Quebec or Alberta files a separate provincial corporate return, because the T2 serves as the provincial return everywhere else (CRA T2 page).

• Quebec: a corporation with an establishment in Quebec files Revenu Québec's corporation income tax return, the CO-17, within six months of the year-end, even if it is based elsewhere (Revenu Québec). Revenu Québec's own rules decide what counts as an establishment.
• Alberta: unless exempt, a corporation files an AT1 if it had a permanent establishment in Alberta at any time during the tax year, within six months of the year-end (Alberta).

The federal points above (records, the shareholder-loan rule and GIFI) apply wherever the corporation is. The Quebec and Alberta returns add provincial requirements this page does not cover.

What if the business ran before I incorporated?

The corporation did not exist before its incorporation date, so costs the owner paid before then, and a sole proprietorship's assets and balances, enter its books through separate opening entries. See costs paid personally, books after incorporating a sole proprietorship and incorporation costs.

What are the common bookkeeping mistakes in a new corporation?

Example

These examples are illustrative. Amounts are in Canadian dollars.

The owner puts in $10,000 at the start

An Ontario-based CCPC incorporated under the federal Act receives $10,000 from its owner on day one. If the directors issue 100 common shares for $10,000 and the owner pays, the corporation adds $10,000 to the stated capital account for the common shares (GIFI 3500). If the owner lends the money instead, no shares are issued and the books show $10,000 due to the owner (GIFI 2780 or 3260). Either way the choice is written down when the money moves, not at year-end.

The owner takes $20,000 with no label

An Alberta CCPC has a December 31 year-end. In March of Year 1 it pays its owner $20,000, expecting the owner to repay it. No salary, dividend, reimbursement or loan repayment is recorded, so the books show $20,000 due from the shareholder. Without that expectation it could be a benefit under subsection 15(1) instead. The tax year ends December 31, Year 1, and one year after that is December 31, Year 2. If the owner has not repaid the $20,000 by then, it is included in the owner's Year 1 income. If the owner repays in December of Year 2 and takes $20,000 again in January of Year 3, the repayment may be part of a series and not count. Had the corporation owed the owner $20,000 or more from earlier loans, the same payment would generally be a repayment instead, if those loans were still owing.

A first fiscal period that ends June 30

A BC CCPC's first fiscal period ends June 30, Year 1. Its T2 is due December 31, Year 1. The tax balance is due August 31, Year 1, or September 30, Year 1 if the CCPC conditions are met. The CRA's balance-due page does not say how those conditions apply to a first period, so paying by August 31 is the safe date; confirm before relying on September 30. The return includes an opening balance sheet on Schedule 101 and a closing one on Schedule 100.

Different for you?

• Money has already moved and the books are not set up: personal cards paid costs, deposits went to a personal account, shares were never formally issued, or no one knows the shareholder balance. The opening balance sheet and the classification of each item often call for a professional's review before the first T2. Start with bookkeeping help; the two common cases are in corporate income in a personal account and personal expenses paid by the corporation.
• The business ran before you incorporated: follow books after incorporating a sole proprietorship.
• A T2 is overdue or the CRA sent a notice: see catching up on unfiled corporate returns and corporate tax help.
• The books are months behind: see catching up on overdue books.
• A non-resident owner or foreign investor controls the corporation: it may not be a CCPC, so the CCPC-only points above may not apply. See non-resident owners of a Canadian corporation and losing CCPC status to foreign investors.
• An owner or a company sits in the US: see books for a Canadian company and its US company and cross-border tax help.
• You are choosing between salary and dividends: see salary or dividends.