Catching Up on Overdue Books Before Your Return

What must the books show before a return is prepared?

The books must show the business's income, expenses, assets, debts and owner transactions for the full reporting period. Each figure needs a path back to a transaction record; a bank balance alone does not explain taxable income.

Other self-employed businesses report income when earned and expenses when incurred, even if payment comes later. Farmers, fishers and self-employed commission agents may use the cash method; confirm the method used on the prior return before rebuilding unpaid invoices and bills (CRA: accounting methods). Farmers using cash accounting for income must keep separate accrual records for GST/HST/QST; check unpaid items against those records. Do not switch methods simply to make a bank export match the return. An eligible business changing from accrual to cash uses cash on its next return and attaches an adjustment statement; changing from cash to accrual requires CRA permission requested in writing before the return is due, plus an adjustment statement (CRA: accounting methods).

Which records should I gather first?

Gather the records that establish the opening position and the full transaction trail. The CRA requires records detailed enough to determine tax obligations and entitlements, including records held by a bookkeeper or other third party.

Ask for the last bookkeeper's ledger, trial balance, bank reconciliations, open invoice and bill lists, and a usable export or backup. CRA guidance on electronic records says a change of third party or system must preserve access to the data and its audit trail. If records are scattered, collect them by account and period before entering anything. For an accountant handover, see Switching accountants.

My bookkeeper stopped mid-year. Where do I restart?

Restart after the last month whose entries and bank and card balances you can verify. Keep a copy of that ledger, note the cutoff date, and compare its closing balances with the next statements before adding new transactions.

If a month was entered but never reconciled, inspect its transactions before treating it as complete. For each account, compare the ledger balance with the statement, allowing for uncleared items such as a cheque issued but not yet cashed. Then work forward in order. Record corrections with an explanation and source document; do not overwrite earlier entries just to force a match. CRA's electronic record guidance calls for an audit trail from source documents to summarized accounts and documented changes to recorded transactions.

Make a separate list of missing periods, uncertain entries and source documents still needed. That list prevents an unresolved item from becoming an invented sale, expense or tax credit.

How do I rebuild sales, unpaid invoices and expenses without duplicates?

Use invoices and other source records to identify what happened, then use bank and card entries to identify how it was settled. Match a payment to an existing invoice or bill before creating another income or expense entry.

For sales, list invoices and credits by date and customer, then match deposits and other payments. For card and cash sales, match sales summaries and settlement reports to deposits; record gross sales, refunds and processing fees separately from any net deposit. A deposit can be a customer payment, owner contribution, loan, tax refund or transfer between accounts; investigate its source before calling it sales. Include cash and non-cash sales supported by records. The CRA requires gross income records to show the date, amount and source, with original support such as invoices, cash register tapes or deposit slips. Under accrual accounting, an unpaid invoice can still belong in income for the period it was earned (CRA: accounting methods).

For purchases, match supplier invoices to card charges or bank payments. Keep unpaid bills on a separate list so they are included in the proper period if the business uses accrual accounting. Identify returns, refunds and credit notes. Keep capital purchases distinct from routine expenses; CRA expense guidance treats capital property differently. For a T2125, reduce an expense by any GST/HST claimed as an input tax credit. Reconcile each bank and card account after recording the period, then review unmatched entries rather than assigning them by guesswork.

Can bank or card statements replace missing receipts?

A bank or card statement helps prove that money moved, but often cannot establish what was bought or how much was for business. Request a duplicate invoice, receipt, contract or supplier statement first, and keep it with the payment record. The CRA says business expenses need an invoice, agreement, receipt or other voucher supporting the expenditure.

When a supplier cannot provide a receipt, record the supplier's name and address, payment amount and date, and transaction details in the expense journal, as CRA business records guidance directs. Keep any contract, correspondence or other available proof. Mark what remains uncertain for the tax preparer; a statement entry alone does not establish a deduction.

An input tax credit has a separate evidence test. CRA requires sufficient documentation before an ITC is claimed, including information about the supplier, transaction and GST/HST charged as applicable. Do not infer GST/HST from a card charge or claim an ITC without adequate support. See Filing GST/HST and input tax credits for the claim and correction rules.

How do I separate personal spending and owner transfers?

Classify each mixed transaction by what it actually represents. A transfer between the owner's accounts and the business account is not automatically sales or an expense; a personal purchase on the business card is not a business cost.

For a sole proprietor, track withdrawals as drawings and personal funds or assets put into the business as contributions. For a partnership, check the agreement and supporting records before classifying each partner transfer as a contribution, drawing, loan or loan repayment; keep each partner's balance separate. The CRA's self-employed income guide describes contributions, while its partnership guide distinguishes partner loans. Record only the business part of a mixed-use expense; the CRA excludes personal expenses from T2125 deductions.

For a corporation, maintain a separate list of every owner payment in and out and its evidence. The tax preparer needs to determine whether each item is a reimbursable business cost, loan, pay, dividend or other shareholder transaction. A corporation's payment of an owner's personal bill needs that review rather than an automatic expense entry. See Business expenses paid personally for recording and reimbursement details.

If a corporation transfers property to a non-arm's-length owner for less than fair value, the owner can owe some of its income tax or GST/HST for the transfer period or an earlier period, limited by the debt and value shortfall. The CRA may assess the recipient at any time, even if the corporation's tax was assessed after the transfer, under Income Tax Act section 160 or Excise Tax Act section 325.

How do I check GST/HST and payroll against returns already filed?

Reconcile the rebuilt tax accounts by reporting period to the returns, slips, remittances and CRA account activity already on file. A difference is a question to resolve, not an invitation to change a filed return silently.

Check whether an eligible registrant elected the GST/HST Quick Method online or on Form GST74 when CRA administers the account, for each filed period. Annual filers must elect by the first day of the second fiscal quarter, except that new registrants with a short first period can elect by that return's due date; monthly or quarterly filers by the due date of the first Quick Method return. Eligibility can end when revenue or business activity changes. Where it applied, reconcile its remittance separately from tax collected, including any first-sales credit; do not claim operating-expense or inventory-purchase input tax credits, and include tax retained under that method in income. Eligible capital purchases may still generate input tax credits.

The CRA says GST/HST records must support tax collected and credits claimed, while payroll records must show employee hours and amounts withheld. The T4 Summary instructions require its totals to agree with the slips and compare deductions with remittances. GST/HST periods and payroll calendar years may differ from the income tax year, so label each comparison by its actual period. If a filed GST/HST return needs correction, follow Filing GST/HST and input tax credits.

A sole proprietor owes the business's remittances directly. Current and former general partners can owe partnership GST/HST that became due while they were partners; those who were partners at dissolution can owe amounts due afterward. Prejoining debt can also reach partnership property under Excise Tax Act section 272.1(5). Corporate directors can owe unremitted income-tax deductions, CPP contributions, EI premiums and net GST/HST under Income Tax Act section 227.1, Canada Pension Plan section 21.1, Employment Insurance Act section 83 and Excise Tax Act section 323, subject to statutory collection and diligence conditions. The CRA must assess GST/HST directors within two years after they cease; payroll recovery proceedings must begin within that period.

Should a corporation's opening balance sheet match last year's close?

Normally, start the corporation's current ledger from the prior year's final closing balances, then explain any difference. A changed opening balance can affect the current balance sheet, shareholder accounts and the T2 financial information.

Compare opening bank, card, receivable, payable, loan, GST/HST, payroll and equity balances with the prior final trial balance and financial statements. Compare the prior filed T2 financial-statement information with those final statements as well. Check whether the prior tax preparer posted year-end adjustments after the bookkeeper's copy was made. Trace each difference to an adjustment, a corrected prior figure or an omitted transaction; keep the explanation with the books. The CRA's GIFI guidance uses balance sheet and income statement information for the T2. For the statement and GIFI work itself, see Year-end financial statements for a corporation.

What shows the books are ready for the tax preparer?

If the return is due soon, send the preparer the last verified month, available records and unresolved-item list now. The books can supply return figures when the full period is recorded and material balances are reconciled or explained with evidence. Give the preparer any remaining questions before those figures are used.

For a self-employed T1, tax is generally due April 30 and the return June 15 of the following year. A corporation generally pays within two months of year-end (three months for a qualifying CCPC) and files its T2 within six months. If a T5013 is required, it is due March 31 after the year for all-individual partners, five months after year-end for all-corporate partners, or the earlier date for mixed partners. A late T1 or T2 with unpaid tax generally costs 5% plus 1% per full month, up to 12 months; a late T5013 costs $25 per day, from $100 to $2,500 (CRA: T5013 guide). If CRA demanded a late T1 or T2 and a late-filing penalty applied in any of the preceding 3 tax years, the repeat penalty is 10% plus 2% per full month, up to 20 months (Income Tax Act section 162).

• Reconcile each bank and card balance to its final statement and list uncleared items.
• Match customer payments and supplier payments to open invoices and bills; review old unpaid items.
• Review sales and expense categories, refunds, capital purchases, inventory where relevant, and mixed-use costs.
• Tie owner contributions, draws and corporate owner transactions to their supporting records.
• Compare GST/HST and payroll balances with filed returns, slips, remittances and CRA account activity.
• For a corporation, agree opening balances to the prior final close and explain adjustments.
• Send a full-period income-and-expense summary, transaction detail, reconciliations, open invoice and bill lists where used, source records and an issue list. Include a trial balance and balance sheet if the business keeps them; a corporation's T2 preparer also needs its income-statement and balance-sheet information.

The CRA does not ask you to send source records with an income tax return, but generally requires them for six years from the end of the last tax year they relate to (CRA: Keeping Records). A preparer may still need them to resolve uncertain amounts before filing.

Example

Illustrative amounts in Canadian dollars. A corporation's records stop after August. Its last verified bank balance is C$10,000. The September bank statement shows a C$5,000 customer deposit, a C$2,000 transfer from the owner and a C$1,000 supplier payment. The bookkeeper also has a C$5,000 sales invoice that the customer paid in September.

Record the C$5,000 invoice once in the period earned and match the deposit to it; the payment is not a second sale. Keep the C$2,000 owner transfer in an owner transaction account pending review, not sales. Match the C$1,000 payment to its supplier invoice; the invoice and payment are not two expenses. The bank balance is C$16,000 before any uncleared items (C$10,000 + C$5,000 + C$2,000 − C$1,000). Then check GST/HST and owner balances against filed records and give unresolved items to the tax preparer.

Different for you?

The next step changes if returns are unfiled, deadlines are close or records cannot be supported.

• Several corporate T2, GST/HST or payroll returns were never filed: see Catching up on unfiled corporate returns.
• Personal or sole-proprietor returns are unfiled: see Catching up on unfiled returns.
• A corporate filing or payment deadline is close: see Filing your corporate return.
• A sole-proprietor return or payment deadline is close: see When you need a tax accountant.
• Your GST/HST filings or credits need correction: see Filing GST/HST and input tax credits.
• You are replacing an accountant or cannot retrieve the old records: see Switching accountants.
• Quebec applies: Collect QST and provincial payroll records, plus the figures for TP-80 for sole proprietors and partners, TP-600 and RL-15 for partnerships where required, or CO-17 for corporations with a Quebec establishment. Reconcile provincial returns and account statements too. For a Quick Method election administered by Revenu Québec, check Form FP-2074-V.
• An Alberta corporation applies: Its preparer also needs figures for the separate AT1 return, due within six months after year-end.
• The source records, owner transactions or opening balances remain uncertain: bring the issue list and available documents for bookkeeping help before relying on the rebuilt figures.