Year-end financial statements for a Canadian corporation

Does my corporation file financial statements with its T2?

Most corporations send financial statement information with the T2 as GIFI codes rather than attach traditional statements. If notes or an auditor's or accountant's report were prepared, include them with the return. Keep the statements and working papers because the CRA may request them. Insurance corporations involved in underwriting must send their statements because GIFI does not meet their reporting needs.

For a small corporation, the core information is a balance sheet at year-end, an income statement for the year and a retained earnings reconciliation. With full GIFI schedules, Schedule 100 holds the closing balance sheet, Schedule 125 the income statement and Schedule 141 questions about who prepared the information and whether there were reservations. Eligible corporations filing paper forms may use GIFI-Short (Form T1178).

If the corporation is incorporated federally, its directors also have an annual duty to present financial statements to shareholders. Corporations Canada says those statements must follow generally accepted accounting principles. That corporate duty exists separately from the T2 reporting method. Provincial corporations must check their own incorporation statute.

For T2 deadlines, schedules beyond GIFI and filing method, see Filing your corporate return.

What is GIFI, and how do I map my accounts to it?

GIFI is the CRA's list of codes for balance sheet and income statement items. First reconcile the corporation's accounts and record year-end adjustments. Use the resulting account balances, called the adjusted trial balance, to prepare the statements. Then map each statement item to a code using the CRA's order: exact match, appropriate item, then generic item.

For full GIFI, use the same level of detail as the statements: the CRA says not to submit only totals. Required codes for a non-farming corporation include 2599 (assets), 3499 (liabilities), 3620 (equity), 8299 (revenue), 9368 (expenses) and 9999 (net income after tax). Include 3849 when reporting retained earnings; paper Schedules 100 and 101 mark it as required. Enter zero for a required item with no amount. Assets must equal liabilities plus equity, and revenue less expenses must agree with reported income. The retained earnings close must agree with the balance sheet. A balanced trial balance alone does not prove the accounts are right. Long-term balances and balances involving corporate shareholders or directors use different codes.

Report each corporation's own figures, not a group total. The CRA generally requires Canadian dollars. An eligible Canadian-resident corporation that keeps its books in a qualifying foreign currency can elect to report in that currency by filing Form T1296, signed by an authorized officer, no later than 60 days after the first day of the tax year. If the records include US-dollar transactions, see US-dollar sales and marketplace payouts.

Does the CRA require a CPA to prepare the statements?

The CRA does not require a CPA-prepared statement for an ordinary T2. Its Schedule 141 asks whether the person mainly involved has an accounting designation and whether that person is connected to the corporation, so owner-prepared information is contemplated. The corporation remains responsible for complete records and supporting documents even when it hires help (CRA record rules).

That answer covers the CRA filing requirement. An incorporation statute, shareholder agreement, lender or investor can require statements prepared under a particular accounting basis or accompanied by a report. Check those requirements before ordering year-end work. A T2 preparer and a financial statement practitioner can be different people; Schedule 141 asks about both.

Notice to reader, compilation, review or audit: which one is needed?

For a T2 alone, none of these reports is automatically required. Choose the report by the corporation's legal duty and the stated needs of the people using the statements, then confirm the engagement with the practitioner.

The terms describe different levels of work, not different T2 forms. A federal government explanation of the reports describes compilation as giving no assurance and review as limited assurance. A requested report should say exactly which level is accepted. If a recipient asks for a "notice to reader," confirm whether it accepts a compilation engagement report under CSRS 4200; Ontario's regulation uses that title for current compilations.

Can the shareholders waive an audit?

For a federally incorporated corporation, shareholders appoint an auditor at each annual meeting unless a valid waiver applies. If the corporation is not a distributing corporation, every shareholder, including non-voting shareholders, must consent to the waiver. It lasts only until the next annual meeting. Keep the resolution with the corporate records.

Waiving the auditor does not waive annual financial statements or a lender's separate audit requirement. The federal Act still requires directors to put statements before shareholders. A provincial corporation must check its own statute rather than use the federal waiver rule.

Which statement figures affect the T2, and why does amortization differ from CCA?

The T2 starts from accounting profit, then adjusts it for tax. Schedule 1 reconciles the income statement's net income with income for tax purposes; Schedule 8 calculates capital cost allowance, or CCA, for eligible depreciable property.

The sales, expense, inventory and year-end payable figures determine accounting profit. The balance sheet supports assets, debts, shareholder balances and retained earnings. Book amortization spreads an asset's cost under the statements' accounting basis. CCA follows tax classes, available-for-use rules and a claim the corporation may make up to its permitted maximum. The amounts often differ, so do not copy amortization into the CCA claim. The tax reconciliation adds back book amortization and deducts the CCA claimed where applicable (CRA T2 guide). For calculating the claim, see Capital cost allowance.

A debit shareholder account is a receivable from the shareholder, not a business expense; its tax treatment needs a separate check. See Shareholder loans. For choosing salary or dividends before year-end, see Salary or dividends.

What changes at the first year-end?

A new corporation starts its first tax year on its incorporation date and generally chooses its first year-end on the first T2. That first period cannot exceed 53 weeks, and the statements or GIFI must match the T2 period (CRA tax-year rules). A professional corporation in a partnership has a specific calendar year-end rule, so check that situation before choosing a date.

When a first-year corporation has financial statement information to report, it provides opening and closing balance sheets: full GIFI uses Schedule 101 for the opening position and Schedule 100 for the closing position; GIFI-Short uses Form T1178's opening balance sheet box (CRA GIFI guide). The inactive-corporation exception below may apply when there is no information to report. Record initial share capital, owner advances and any assets transferred to the corporation separately from sales. A short first period can also change the tax calculation; see Filing your corporate return.

Does an inactive corporation still need statement information?

An inactive corporation still needs to determine whether it has any balance sheet or income statement information. Bank fees, interest, unpaid bills and shareholder loans can exist without sales. If there is information to report, use GIFI. The CRA says a corporation inactive throughout the year with no balance sheet or income statement information need not attach Schedules 100, 125 and 141.

This is a GIFI exception, not an answer to whether a T2 is due. See Which returns your business files.

How long must the corporation keep its books and statements?

Generally, keep the corporation's books, statements, working papers and source documents for six years after the end of the last tax year they relate to (Income Tax Act, section 230). Records supporting an asset's cost may matter in later years, so the clock can run from the last year the asset affects tax, not its purchase year (CRA retention guidance).

If a required T2 was filed late, the six years generally run from the day it was filed. Keep records longer where an objection, appeal or CRA direction requires it. Keep directors' and shareholders' minutes, share ownership records, the general ledger and contracts needed to understand it until at least two years after dissolution, and longer if another rule still applies (Income Tax Regulations, section 5800). Electronic records must remain readable, and outsourcing storage does not transfer the corporation's responsibility (CRA record rules).

Example

Illustrative Canadian dollars. A corporation's adjusted income statement shows C$200,000 of sales, C$130,000 of operating costs and C$10,000 of book amortization. Its accounting profit before tax is C$60,000. Assume no income-tax expense was booked, so net income after tax is also C$60,000. It bought equipment during the year; assume its separately calculated CCA claim is C$8,000.

The T2 reports the income statement through GIFI. In the tax reconciliation, it adds back C$10,000 of book amortization and deducts C$8,000 of CCA, giving C$62,000 before any other tax adjustments. The equipment remains on the balance sheet at cost less accumulated book amortization. Its tax balance is tracked separately for future CCA claims.

Different for you?

• First year-end or unreliable balances: gather the incorporation documents, adjusted trial balance, bank and card statements, loan agreements, asset invoices, inventory count, payroll and GST/HST filings, and any prior T2. See Bookkeeping help.
• A lender or investor wants a report: ask for its exact wording, accounting basis and required level of assurance before engaging a practitioner. See Bookkeeping help.
• You took money from the corporation: reconcile the account and see Shareholder loans.
• Your corporation has unfiled years: establish each year's closing balances in order; see Catching up on unfiled corporate returns.