Who this is for
- Canadian corporations whose T2 income does not match the net income on their financial statements
- Owners and bookkeepers preparing statements that a T2 will be built from
Not covered here
- Which statements a corporation needs and who prepares them
- Capital cost allowance by class and the amortization schedule itself
- Whether a cost is deductible at all
- The Quebec and Alberta returns, line by line
- Loss carryovers and other deductions from net income to taxable income
- Sole proprietors and partnerships
Is the profit on my financial statements the same as my taxable income on the T2?
Usually not. Financial statements follow accounting standards. The T2 follows the Income Tax Act, which starts from the corporation's profit but then refuses some expenses, replaces others with its own deductions and taxes some items differently. The CRA says the net income on the financial statements will not be the same as the net income for tax purposes. Schedule 1 is the bridge between the two. The usual gaps are amortization (replaced by CCA), the income tax provision and the part of meals the Act does not allow.
Two terms get mixed up. Net income for tax purposes is the result of Schedule 1 and goes on T2 line 300. Taxable income is line 360, after deductions such as loss carryovers and donations. The CRA's guide says those are not taken on Schedule 1.
A reconciliation is short when the year has ordinary expenses, a few meals and no asset sales. It is not simple when the corporation:
- bought or sold equipment or a vehicle;
- booked reserves (an amount expensed now for a cost expected later, such as warranty work), or sold investments at a gain;
- ran personal costs through the books;
- had a short tax year, such as a first year or one cut off by a change of control;
- is in Quebec or Alberta;
- is filing from statements someone else prepared and cannot trace each difference.
If a difference cannot be traced to a ledger account, or the statements and Schedule 1 do not tie, that is the point to bring in a professional before the T2 is filed (corporate tax help), because asset and reserve balances carry into every later year.
Gather before starting:
- the year-end income statement and balance sheet, or the adjusted trial balance;
- a fixed-asset list with dates, costs and any sales;
- last year's Schedule 8 (closing balance of each class) and Schedule 1 (reserve balances);
- the meals, club and any personal-cost accounts, with limited costs kept apart.
What is Schedule 1, and where does it start and end?
Schedule 1 is the CRA form that reconciles net income on the financial statements with net income for tax purposes. It starts with net income after taxes and extraordinary items from line 9999 of Schedule 125 and ends with an amount that goes on line 300 of the T2 (Schedule 1 form).
| Step | Lines | What goes there |
|---|---|---|
| Start (amount A) | Schedule 125, line 9999 | Net income after income tax, as in the statements |
| Add | 101 to 199 | Taxable items and non-allowable expenses: tax provision, amortization, recapture, non-deductible meals and club dues, booked reserves, book losses on sales |
| Deduct | 401 to 499 | Non-taxable items and allowed expenses: book gains on sales, CCA, terminal loss, reserves reversing |
| End (amount C) | T2 line 300 | Net income (loss) for income tax purposes |
Line numbers follow the CRA's Schedule 1 for 2023 and later tax years. The CRA can renumber lines, so check the form for the year being filed.
Which items usually differ between book income and tax income?
Each common difference has its own line on Schedule 1.
| Item | In the statements | On Schedule 1 | Timing or permanent |
|---|---|---|---|
| Income tax expense | Expense | Add back, lines 101 and 102; tax payable under the Act is not deductible | Permanent |
| Amortization | Expense spread over useful life | Add back, line 104 (tangible) or 106 (intangible) | Timing |
| CCA | Not recorded | Deduct, line 403 | Timing |
| Equipment or other capital costs expensed in the books | Expense | Add back, line 206 (a capital outlay is not deductible); CCA is then claimed through Schedule 8 | Timing |
| Meals and entertainment | Full cost as expense | Add back the non-deductible part, line 121 | Permanent |
| Club dues and fees | Expense | Add back, line 120 | Permanent |
| Fines and penalties imposed under a law | Expense | Add back, line 128 (section 67.6). The CRA's folio says a penalty under a private contract is outside that section, so check it separately | Permanent |
| Reserves booked in the statements | Expense now, reverses later | Add back the closing balance, line 126; deduct the opening balance, line 414 | Timing |
| Bonus or salary accrued at year-end and still unpaid 180 days after the year-end | Expense in the year booked | Add back in the year booked and deduct in the year paid (section 78(4)) | Timing |
| Sale of equipment | Book gain or loss | Remove the book gain (401) or add back the book loss (111); bring in recapture (107) or terminal loss (404) | Timing |
| Gain on selling investments held as capital property (not investments traded as a business) | Whole gain in income | Remove the book gain (401); add the taxable capital gain (113) | Permanent for the untaxed part |
Other lines include non-taxable dividends under section 83 (line 402), charitable donations expensed in the books (line 112; donations are deducted after Schedule 1) and non-deductible automobile expenses (line 122). A year-end bonus is covered in salary or dividends.
Section 18(1) bars the use or maintenance of a yacht, camp, lodge or golf facility and fees for a club whose main purpose is dining, recreation or sport (paragraph l), and personal or living expenses (paragraph h). A personal cost booked as a business expense is normally corrected in the books rather than adjusted on Schedule 1, and the owner may also be taxed on it as a shareholder benefit; see personal expenses paid by the corporation. Whether a cost is deductible at all is covered in business expenses the CRA accepts.
Why does amortization in the statements never match CCA?
Amortization is an accounting estimate that spreads an asset's cost over its useful life. The Act does not allow it as a deduction: section 18(1)(b) bars depreciation allowances unless the Act expressly permits them, and section 20(1)(a) permits capital cost allowance as set by regulation.
CCA works differently. Each asset goes into a prescribed class. Schedule 8 tracks each class's undepreciated capital cost (UCC), and the corporation claims CCA up to a maximum (generally prorated in a tax year shorter than 12 months); the CRA's guide says it may claim a lower amount. So the two amounts usually differ. The gap can reverse over later years, but selling one asset does not necessarily clear it, because recapture and terminal loss are worked out by class.
On Schedule 1, amortization is added back and the Schedule 8 total is deducted. Book amortization is not an input to Schedule 8; CCA is worked out from each class's undepreciated capital cost. For the books side line by line, see amortization and CCA in corporate books; for claiming by class, see capital cost allowance.
Why is only half of my meals and entertainment deductible, and where does the other half go?
The Act generally treats food, drink and entertainment as costing 50% of the lesser of the amount paid and a reasonable amount (section 67.1). If the amount paid was more than reasonable, the add-back is larger than half.
The books keep the full cost, because it was a real cost. Schedule 1 line 121 adds back the non-deductible part, and it never returns in a later year. Section 67.1(2) lists exceptions, such as an amount a client reimburses when the reimbursement is identified in writing. Long-haul truck drivers use a different share, 80%, for food and beverages during an eligible travel period (section 67.1(1.1)). To keep the add-back easy to find, see meals and entertainment in corporate books.
What happens to a book gain or loss when I sell equipment?
The statements show proceeds less book value. Tax uses the class's UCC instead, so Schedule 1 removes the book result and puts the tax result in its place. Recapture is measured at the end of the tax year, not sale by sale. Recapture is CCA claimed earlier that comes back into income because the proceeds exceed what is left of the class's tax value. A terminal loss is the opposite: the class is empty but some tax value is left, and it is deductible.
| At year-end | Tax result | Schedule 8 column | Schedule 1 |
|---|---|---|---|
| Proceeds push the class UCC below zero | Recapture is income | 19 | Add, line 107 |
| UCC is left and the corporation owns nothing else in the class | Terminal loss is deductible (section 20(16)) | 20 | Deduct, line 404 |
| Other property remains in the class and UCC stays above zero | No recapture or terminal loss; the lower UCC means smaller future CCA | None | Only the book gain or loss comes off |
Column numbers are from the current Schedule 8, which sends the column 19 total to Schedule 1 line 107 and the column 20 total to line 404. In every row, the book gain comes off at line 401 or the book loss goes back on at line 111.
Three cases follow other rules, all in selling a business asset: a sale for more than the original cost, where part of the gain is a capital gain; a passenger vehicle above the class 10.1 limit; and an asset stolen, destroyed or expropriated, where an election in the return for the year of purchase can defer recapture if the replacement is bought before the later of the end of the second tax year after the year of the loss and 24 months after the end of that year (section 13(4)). An ordinary sale of equipment does not qualify.
If I take all the profit out as a shareholder loan or dividends, does the corporation still have profit?
Yes. Neither is an expense: a dividend is a share of profit paid out, not a cost of earning it, and a shareholder loan is cash lent, not spent. The Act bars a deduction for an outlay not made to earn income. The CRA's General Index of Financial Information (GIFI) lists dividends declared under retained earnings (code 3700), not on the income statement. A loan to the owner is a balance sheet receivable.
Schedule 1 has no adjustment for either. A corporation that lends all of its profit to its owner still has that profit and still reports it. The tax effect falls mainly on the shareholder. A loan to a shareholder, or to a person connected with one, is included in that person's income for the year the loan was received, unless an exception applies, such as repayment within one year after the end of the corporation's tax year in which the loan was made when the repayment is not part of a series of loans and repayments. Whether a given loan is caught depends on its facts; see shareholder loans.
A private corporation that pays a taxable dividend may get a dividend refund of refundable tax, figured outside Schedule 1, and generally files T5 slips by the last day of February after the dividend year; see declaring and paying a dividend.
Salary is different. It is an expense in the statements, and the tax deduction follows its own rules. See salary or dividends.
Which differences are timing, which are permanent, and how do I keep a record?
A timing difference reverses in another year; a permanent difference never does. Amortization against CCA, and booked reserves, are timing. Half of meals, club dues, fines imposed under a law and the income tax expense are permanent.
Reserves show the reversal on the form itself: the closing balance is added back on line 126 and the opening balance is deducted on line 414. Other reserves the Act allows are claimed on Schedule 13 instead: Part 2 adds the opening balance, and any amount transferred on an amalgamation or wind-up, at line 125 and deducts the closing balance at line 413. Capital gains reserves use Part 1 of Schedule 13 and Schedule 6.
Records that let the next reconciliation be traced:
- each class's closing UCC from Schedule 8 (it becomes next year's opening balance);
- reserve balances from Schedule 1 and Schedule 13;
- a fixed-asset register showing book cost, accumulated amortization, CCA class and UCC side by side;
- a separate ledger account for meals and entertainment that is limited;
- a Schedule 1 working paper that ties every line to a ledger account, kept with the working papers behind the accounts the CRA expects.
How do GIFI schedules 100, 125 and 141 fit with the T2 and Schedule 1?
The T2 carries the financial statements as GIFI codes on schedules 100, 125 and 141, and Schedule 1 starts from the income statement schedule.
| Schedule | What it holds | Link to Schedule 1 |
|---|---|---|
| 100 | Balance sheet at year-end, including retained earnings and shareholder balances | None directly |
| 125 | Income statement: revenue, expenses and, at line 9999, net income after taxes | Line 9999 is amount A |
| 141 | Questions about who prepared the financial information, any reservations in an accountant's report, and whether notes exist | None |
| Schedule 1 | The reconciliation | Amount C goes to T2 line 300 |
A corporation using GIFI does not submit its financial statements; the CRA asks for them if it needs them. Notes to the statements and any accountant's or auditor's report that exist must still be included, even when the return is filed with tax preparation software.
Accounts that map cleanly to GIFI make each Schedule 1 adjustment easy to find. See chart of accounts for GIFI and year-end financial statements for a corporation.
Do Quebec and Alberta corporations reconcile the same way?
Federal Schedule 1 is the same everywhere, but Quebec and Alberta add their own provincial return. The CRA administers provincial corporation tax except for Quebec and Alberta, and a corporation located in either files a separate provincial corporate return.
Alberta. A corporation with a permanent establishment in Alberta generally files an AT1 return unless an exemption applies. The AT1 starts from T2 line 300. If Alberta and federal amounts are the same, the figures match; if they differ, AT1 Schedule 12 reconciles them. Who must file the AT1 is in filing your corporate return.
Quebec. The return goes to Revenu Québec, which applies Quebec's own rules. This guide covers the federal Schedule 1 only. Who must file the Quebec return and what it needs are in filing your corporate return; confirm the Quebec reconciliation with the Quebec return itself. In every other province and territory the CRA administers the tax, so the federal Schedule 1 is the reconciliation.
Example
These examples use Canadian dollars. Each ignores the year's other adjustments.
From the statements to line 300
A consulting corporation's statements show net income after tax of C$96,000. That is after a C$24,000 income tax provision, C$10,000 of amortization and C$8,000 of meals, all subject to the 50% limit. It claims C$18,000 of CCA on Schedule 8.
| Schedule 1 | Line | Amount |
|---|---|---|
| Net income after tax (A) | 9999 | C$96,000 |
| Add: income tax provision | 101 | C$24,000 |
| Add: amortization of tangible assets | 104 | C$10,000 |
| Add: non-deductible meals (half of C$8,000) | 121 | C$4,000 |
| Deduct: CCA | 403 | C$18,000 |
| Net income for tax purposes (C) | 300 | C$116,000 |
Line 300 is net income for tax purposes. Taxable income can be lower after loss carryovers or other deductions.
Selling a van
A corporation sells a van, the only property in its CCA class. The van cost C$30,000, its book value is C$14,000 and the class UCC at the start of the year is C$8,000. Prices are net of selling costs, and nothing else in the class is bought or sold that year.
- Sold for C$20,000 (below cost, so no capital gain): the statements show a C$6,000 book gain. UCC falls to minus C$12,000, so C$12,000 of recapture is income. Schedule 1 deducts C$6,000 at line 401 and adds C$12,000 at line 107.
- Sold for C$5,000: the statements show a C$9,000 book loss. UCC left is C$3,000, so there is a C$3,000 terminal loss. Schedule 1 adds C$9,000 at line 111 and deducts C$3,000 at line 404.
In both cases the sale makes line 300 C$6,000 higher than the statements' result. That is the gap from earlier years reversing: C$22,000 of CCA claimed (C$30,000 less C$8,000) against C$16,000 of amortization booked (C$30,000 less C$14,000).
Taking C$50,000 as a shareholder loan
An owner draws C$50,000 from the corporation and records it as a shareholder loan. Cash falls by C$50,000 and a receivable from the owner rises by the same amount. The income statement does not change, so net income and net income for tax purposes stay the same. Whether the owner must include the loan in income, for the year it was received, depends on the repayment rules in shareholder loans.
Different for you?
- Your statements and your T2 income disagree and you cannot say why, or you bought or sold equipment or a vehicle: the timing and permanent differences have to be split line by line, and recapture or a terminal loss changes line 300. Have the reconciliation traced before the T2 is filed with corporate tax help. For the asset side, see selling a business asset and capital cost allowance.
- You are filing your own T2 from a bookkeeper's statements: see filing your corporate return, and have Schedule 1 checked against the statements with corporate tax help. For what a T2 costs, see corporate return cost and quotes.
- Your accounts do not map to GIFI, or there is no asset register: fix the books first with bookkeeping help so the next Schedule 1 can be built from them.
- The owner took money out and it is not clear how it was recorded: see shareholder loans.
- The corporation is in Quebec or Alberta: the provincial return follows its own rules, and Alberta's starts from the federal line 300 figure. Get corporate tax help with the federal and provincial returns together.
- A buyer or investor took control of the corporation: its tax year ended at that moment, so the books and Schedule 1 are cut off there and CCA is prorated for the short year. See deemed year-end on acquisition of control.
- Earlier T2s were never filed: see catching up on unfiled corporate returns.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| Days after the tax year-end by which accrued salary, wages or bonus must be paid to be deducted in that year Salary, wages or other remuneration for an office or employment, other than reasonable vacation or holiday pay or a deferred amount under a salary deferral arrangement; counted from the last day of the tax year, which after an acquisition of control is the deemed year-end | 180 days | Income Tax Act, subsection 78(4) Checked |
| Usual income-tax deduction share for meals and entertainment Applies to the lesser of the actual amount paid or payable and a reasonable amount; statutory exceptions apply | 50% | Justice Laws: Income Tax Act, section 67.1 Checked |
| Deduction share for a long-haul truck driver's food and beverages during an eligible travel period Specified percentage for amounts paid or payable after 2010 (Income Tax Act s. 67.1(1.1) and (5)); replaces the usual meals limit for these food and beverage costs | 80% | CRA: Business expenses Checked |
| Deadline to buy replacement depreciable property to defer recapture after a theft, destruction or taking under statutory authority Income Tax Act paragraph 13(4)(c): the amount used to buy the replacement before this time reduces the proceeds in the undepreciated capital cost formula; the taxpayer elects in its return for the year the replacement is acquired. A voluntary sale qualifies only for a former business property (real property), with a shorter limit | The later of the end of the second tax year after the year of the loss and 24 months after the end of that year | Justice Laws: Income Tax Act, subsection 13(4) Checked |
| Shareholder loan repayment exception deadline Subsection 15(2.6) applies when the corporation is the lender and repayment is not part of a series of loans or other transactions and repayments | One year after the end of the corporation's tax year in which the loan was made | Income Tax Act, subsection 15(2.6) Checked |
| T5 filing deadline T5 slips are filed and sent to recipients by this date; weekend and holiday rules may shift the CRA due date | The last day of February after the dividend year | CRA: T5 information return due date Checked |
Primary sources
- CRA: T2SCH1, Net Income (Loss) for Income Tax Purposes
- CRA: Schedule 1 form (2023 and later tax years)
- CRA: T2 Corporation Income Tax Guide (T4012), chapter 3
- CRA: T2SCH8, Capital Cost Allowance
- CRA: Schedule 8 form (2025 and later tax years)
- CRA: Schedule 13, Continuity of Reserves
- CRA: Income Tax Folio S4-F2-C1, Deductibility of Fines and Penalties
- CRA: General Index of Financial Information (GIFI), RC4088
- CRA: Preparing your financial statements using GIFI
- CRA: What is Schedule 141, the notes checklist
- CRA: Provincial and territorial corporation tax
- CRA: T2 Corporation Income Tax Return
- Alberta: Information Circular CT-1R3, Overview of the Alberta Corporate Income Tax Program
- Alberta: Information Circular CT-2R11, Corporate Income Tax Filing and Payment Requirements
- Justice Laws: Income Tax Act, section 9
- Justice Laws: Income Tax Act, section 13
- Justice Laws: Income Tax Act, section 15
- Justice Laws: Income Tax Act, section 18
- Justice Laws: Income Tax Act, section 20
- Justice Laws: Income Tax Act, section 67.1
- Justice Laws: Income Tax Act, section 67.6
- Justice Laws: Income Tax Act, section 78
- Justice Laws: Income Tax Act, section 129
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.