Restate Last Year's Financial Statements or Fix This Year (T2)

Does the error change last year's taxable income, or only the balance sheet?

The test that decides everything else is whether the error changed last year's income, deductions or tax, or only a balance-sheet account. A corporation's business income is its profit for the taxation year (Income Tax Act, section 9). A tax error generally belongs to the year it happened in, so a tax change means a change to last year's T2. A balance-sheet-only error may leave the tax as filed.

Fixing a tax error only in this year's books does not correct last year's T2. If the amount goes through this year's income, this year's T2 is wrong too; if it goes straight to retained earnings, it reaches no year's taxable income.

A case is not simple when:

• the error touches taxable income or tax in any year;
• last year ended in a loss or with no tax owing (which is not always a loss year), because a wrong loss amount or loss use carries into later years (Income Tax Act, section 111);
• it spans more than one year, or the oldest year is close to the end of the CRA's time limit;
• a lender, an investor or the shareholders already hold the old statements, or a sale, loan or investment is coming and the statements will be reviewed;
• the same figure also fed a GST/HST return, payroll remittances or a T4 or T5 slip, which are corrected separately from the T2;
• a shareholder account is involved, because the tax rules on shareholder loans depend on which way the balance runs.

Start with both years' statements, last year's filed T2 with its GIFI, and the notices of assessment. The last section lists everything to gather.

Should we restate last year's statements or correct the error in this year's books?

The accountant picks the way to show the correction under the accounting standard the statements follow. Materiality is an accounting judgment, not a CRA threshold. Opening balances are last year's closing figures carried into this year. Comparatives are last year's figures shown beside this year's.

Choosing a route does not by itself change last year's T2. If the error changed tax, that is a separate step, covered next.

The accountant here means whoever prepared the statements and can judge materiality under the standard they follow. A bookkeeper keeping the ledger does not make that call (see bookkeeper, accountant or CPA). If the statements were prepared without an accountant, bring one in before anything goes to the CRA or a lender.

Do we have to refile or amend last year's T2?

If the error changed tax, the correction is a change request to the CRA for that year, which the CRA calls requesting a reassessment. The corporation does not refile the whole return: the CRA says not to send the entire T2.

The CRA says a corporation may request changes to an assessed T2 to correct amounts or add information that was left out. The CRA decides each request. Its circular says even an accepted request may or may not result in a reassessment.

If only the balance sheet was wrong and tax is unchanged, the CRA's pages do not say whether the filed return must be corrected. That is a judgment for the accountant. It matters most when a later return, a lender or a buyer will compare the filed balance sheet with the corrected one.

A change to last year's taxable income or loss can change amounts carried into later years already filed, such as loss balances. Each of those years has its own reassessment period counted from its own notice of assessment, so list every year the correction touches.

How do we ask the CRA to change a T2 we already filed, and how long do we have?

A corporation can send the change through commercial T2 software, which the CRA calls the fastest way, send the bar codes that carry the information, or write to the tax centre that serves the corporation (CRA: requesting a reassessment). The time limit is the CRA's normal reassessment period for that year.

The Act counts from the earlier of the original notice of assessment and the original notice that no tax is payable. Both periods are in Income Tax Act, section 152 and in the CRA's T2 reassessment page.

After the period ends, the CRA can reassess only in limited cases, and a request made after it will generally not be considered. The Act does not define neglect or carelessness, so an old year should not be assumed safe.

Two things work differently. A loss: the CRA may correct an unused non-capital loss after the loss year's own period, if the loss has not expired, was not applied to a year that is now closed, and any formal loss determination is still open to redetermination (IC75-7R4, paragraph 36). And after a reassessment changes a loss or income balance, a later year can be reassessed for the related change until the later of its own normal period and one year after the objection and appeal rights on the changed year end (section 152(4.3)).

For a refund, the original T2 must also have been filed within three years after the year ended (section 164(1)). A recent notice of assessment alone does not settle it.

The Act's longer window for refund requests covers individuals and graduated rate estates only, not corporations (section 152(4.2)). For the exceptions and how the window is counted, see how far back the CRA can reassess.

Where does the correction go on the T2?

A tax error is fixed in the year it belongs to, through the change request, not by a new line. Only a correction the accountant treats as a prior period adjustment shows in the retained-earnings part of the statements, on the GIFI line named Prior period adjustments (item 3720), next to net income (item 3680) and dividends declared (item 3700) (CRA: GIFI). Retained earnings are the profit kept in the corporation over the years. The GIFI guide gives that line no further description, so whether a given correction belongs there is the accountant's call under the accounting standard.

The T2 also asks. If this year's opening retained earnings or equity includes an amount to correct an error, Schedule 141 line 265 is answered Yes and a separate reconciliation is kept, even when taxable income is unchanged (CRA: Schedule 141).

Schedule 1 (which turns statement profit into taxable income) starts from net income per the financial statements. An amount booked straight to retained earnings never passes through that net income. If the amount belongs in taxable income, the accountant deals with it in the year it belongs to.

A "due to shareholder" liability was left off last year's balance sheet: what changes?

The liability goes up and the account that was wrongly credited goes down by the same amount. Revenue, expenses and net income stay as they were, so taxable income is unchanged if the costs were deducted correctly.

• Changes: the due-to-shareholder liability, the account that was wrongly credited, the balance sheet as issued, and the balance-sheet schedule as filed. GIFI puts current amounts due to shareholders or directors, such as advances, loans and notes, under item 2780, with item 2781 for an individual shareholder, and long-term amounts under item 3260 (CRA: GIFI).
• Stays the same: revenue, expenses, net income, and the deduction for the costs themselves.

Two things can change the tax answer. A shareholder account that ran both ways during the year can fall under the shareholder-loan rules; see loans to and from shareholders. And if the shareholder paid business costs personally, how the corporation repays them is in business expenses paid personally. How the account runs and how to book it is in the shareholder loan account guide.

What if the error means tax was underpaid, or interest or penalties apply?

Yes: extra tax carries interest, whenever the error is found. It runs on the unpaid amount for the period it is outstanding after the date the tax balance for that year was due (Income Tax Act, section 161(1)). A corporation that was required to pay instalments can also owe interest on short instalments, from each instalment due date (subsection 161(2)). A reassessment can change tax, interest and penalties (CRA). Three routes can apply:

An application is not voluntary once an audit or investigation of the disclosed information has started against the corporation or a related taxpayer. The relief percentages and the application steps are in reviews, audits and voluntary disclosure.

A penalty on unreported income applies only in two cases: the corporation left out an amount of $500 or more in the year being corrected and in one of the three preceding years (ITA 163(1)), or it knowingly, or through gross negligence, made a false statement or omission (163(2)). Whether either applies is a question of fact. For penalties already charged, see penalties, interest and relief; for the entries after a reassessment, see recording CRA reassessments and penalties.

The statements already went to a bank, an investor or the shareholders: what do we do about the old copy?

Corporations commonly send a written replacement of the old copy, keep both versions with their dates, and tell each recipient which figures changed. Whether that is required depends on the loan or investment agreement and the accountant's view. The accountant also decides whether a report on the old statements needs reissuing.

• Shareholders. The Canada Business Corporations Act, which governs federally incorporated corporations, has the directors place comparative statements for the latest period and the preceding financial year before shareholders at every annual meeting, and lets the preceding-year statements be left out if the reason is given (section 155). Do not rely on the meeting to tell shareholders; send them the correction in writing. A provincially incorporated corporation follows its own statute and its by-laws.
• Lenders and investors. Their reporting terms are in the loan or investment agreement. Read those terms before replying, and send the corrected statements with a short note of what changed.
• The CRA. If the old statements went in with the T2, the revised ones go with the change request.

What does a Quebec or other provincial corporation check separately?

The T2 serves as the federal, provincial and territorial return, unless the corporation is located in Quebec or Alberta, which have a separate provincial return. The CRA's pages do not say that a change to the T2 carries into that separate return, so the corporation checks how the province wants the correction filed.

For income earned in other provinces and territories, the T2 doubles as the provincial return, so the revised schedules go to the CRA in the same request. A corporation based elsewhere with a permanent establishment in Quebec or Alberta must also complete that province's return, subject to its filing exemptions; customer location alone does not settle it (CRA: T2 guide, chapter 8). Check whether the correction touches a provincial return it had to file.

What do we gather before talking to an accountant?

• Both years' financial statements, as issued
• Last year's filed T2, with its GIFI and schedules
• The notices of assessment and their dates, which start the time limit
• The ledger entries and documents behind the error
• The shareholder account detail, if it is involved
• Everyone who holds the old statements, and the loan or investment terms for reporting
• Any CRA letters, and any payments or instalments made for the year
• For a corporation with a permanent establishment in Quebec or Alberta, the separate provincial return and its notice

Example

These examples use Canadian dollars and round, illustrative numbers.

A missed shareholder liability

In Year 1 the shareholder paid C$30,000 of startup costs personally. The books credited share capital instead of "due to shareholder". The corporation deducted the costs correctly, so Year 1 taxable income is unchanged. The balance sheet shows equity C$30,000 too high and liabilities C$30,000 too low.

The accountant finds this during Year 2 and judges how to show it: move C$30,000 from equity to due to shareholder in Year 2's opening balances and comparatives, with or without reissuing Year 1. Both accounts are on the balance sheet, so no income line and no retained earnings line moves. Year 2's T2 answers Yes at Schedule 141 line 265 and keeps a reconciliation. Whether to correct the filed Year 1 balance sheet is a separate choice.

Sales never booked

Year 1 sales of C$12,000 were never booked, so Year 1 taxable income was too low. Recording the sales in Year 2 would leave Year 1 wrong and overstate Year 2. The corporation sends a change request for Year 1 with revised GIFI and schedules. Interest runs on the extra tax from the date the Year 1 balance was due, and interest on short instalments (tax that should have been paid during the year) can add to it. The sales tax on those sales is a separate return; see when the GST/HST return does not match the books.

An expense never booked

A C$20,000 deductible expense was paid in Year 1 but never booked, so Year 1 taxable income was too high and tax was overpaid. The corporation is a CCPC, it filed the Year 1 T2 on time, and the Year 1 notice of assessment was sent two years and eight months ago, so about four months of the normal period remain, if no extension applies. The corporation can send the change request with revised GIFI inside that time. After the period ends, the CRA will generally not consider the request.

Different for you?

• The error touches tax, spans more than one year, or the old statements are with a lender or investor: which route applies, what revised schedules to file and what to tell the lender depend on the numbers. See corporate tax help.
• The corporation is in Quebec or Alberta: the separate provincial return needs its own change. See corporate tax help.
• The books for several years need rebuilding: see rebuilding books from bank statements and bookkeeping help.
• The CRA has already sent a review or audit letter: follow reviews, audits and voluntary disclosure.
• One or more years were never filed: see catching up on unfiled corporate returns.
• You are unsure how many years the CRA can reach: see how far back the CRA can reassess.
• You do not yet know which statements the corporation needs: see year-end financial statements for a corporation.
• An owner or parent is in the US, or a US filing uses these statements: the corrected figures can change that filing too. See turning Canadian books into the US information return and cross-border tax help.
• The shareholder money came from family or accounts abroad: see money from parents abroad in your business.
• You want to prevent the next miss: use the year-end close checklist.