If you would like to prepare your corporation’s income tax return by yourself, then you must read this article. Step-by-step instructions are provided, making the corporate tax return preparation process pain-free.
This article is a summarization of the video I produced entitled “How to Prepare Corporation Income Tax Return for Business in Canada,” the link for which is shown at the bottom of this article.
Financial Statements – How to Prepare Corporation Income Tax Return for Business in Canada
Before starting the preparation of your Canadian corporation income tax return, you will require the Income Statement and Balance Sheet of your company.
Let’s use Tech Consulting Company Inc. (TCCI), a fictitious company, for demonstration purposes.
- Income statement for 2010
- Sales – $200,000,
- Expenses – $84,000 (including $2,000 for meals and entertainment)
- Profit – $116,000.
TCCI is a profitable company!
- Balance Sheet as of December 31, 2010 (year-end)
- Assets (cash and accounts receivable) – $149,100
- Liabilities (accounts payable and GST payable) – $13,000
- Equity (net assets retained in the corporation) – $136,100
Where do I find corporate tax forms and schedules? – How to Prepare Corporation Income Tax Return for Business in Canada
Where do you get the schedules and forms for the preparation of a corporate tax return? They can be obtained from the Canada Revenue Agency’s (CRA’s) website.
On the homepage of the CRA’s website, enter ‘T2 returns and schedules’ in the search field and then click on ‘search.’
The 8th link in the search results is ‘T2 returns and schedules.’ After clicking on this link, you will see a listing of all of the corporate tax forms and schedules that you could ever possibly need for the preparation of your company’s corporation income tax return. You should only select the forms and schedules that are applicable.
Know the basic corporation tax forms and schedules
The most commonly used schedules for the preparation of a corporation income tax return for a business in Canada are:
- Schedule 100: Income Statement Summary
- Schedule 125: Balance Sheet Summary
- Schedule 50: Shareholder Information
- Schedule 8: Capital Cost Allowance
- Schedule 1: Net Income for Tax Purposes
- Schedule 200: T2 Corporation Income Tax Return
Schedule 100 – Income Statement Summary
Schedule 100 is a summary of the company’s balance sheet. Enter the total assets, total liabilities, and equity on this schedule.
Schedule 125 – Balance Sheet Summary
Schedule 125 is a summary of the company’s income statement. Enter the total sales, operating expenses and net income on this schedule.
Schedule 50 – Shareholder Information
Input the name of each shareholder, their social insurance number, type of shares owned (common or preferred), and % of shares owned.
Schedule 8 – Capital Cost Allowance
Capital Cost Allowance (CCA), which is a tax deduction, represents the wear and tear of the company’s physical assets.
During the year, TCCI purchased furniture for $15,000 and computers for $1,000. These amounts should be entered in column 3 of schedule 8.
In column 11, capital cost allowance is calculated based on the depreciation rates shown in column 8 – 20% for furniture and 100% for computers.
Computers have a special capital cost allowance rate of 100% if they were purchased before February 2011. All other assets are subject to the ‘half year rule’, meaning that only half of the capital cost allowance that would otherwise be allowed, can be claimed in the year of acquisition. Therefore, the capital cost allowance rate for furniture is 10% in the year of acquisition instead of 20% (i.e. $1,500 of capital cost allowance on $15,000 of furniture purchases).
Schedule 1 – Net Income for Tax Purposes
On Schedule 1 you will calculate net income for tax purposes:
- TCCI has net income for accounting purposes of $116,000, as per its income statement. This amount should be entered on line A (amount calculated on line 9999 from Schedule 125) of Schedule 1.
- TCCI incurred $2,000 of meals and entertainment expenses. Therefore, $1,000 of meals and entertainment expenses (half of which are non-deductible) are added back on line 121 of Schedule 1.
- Capital cost allowance of $2,500 [calculated on Schedule 8] should be deducted on line 403 of Schedule 1.
- After the add backs and deductions, the net income for tax purposes of TCCI is $114,500.
Schedule 200 – T2 Corporation Income Tax Return – How to Prepare Corporation Income Tax Return for a Business in Canada
Schedule 200, the T2 corporation income tax return, is an eight page form. The following information should be entered on this schedule:
- On the first page of Schedule 200, the corporation’s legal name and business number are reported.
- On boxes 11 to18 of page 1, the address of corporation’s head office is reported.
- You do not need to enter the mailing address or the location of the books and records if they are the same as the head office’s address.
- The taxation year (e.g. January 1, 2010 to December 31, 2010) should be entered on boxes 60 and 61 of page 1.
- On box 80, yes should be checked if your corporation is a resident of Canada.
- On box 40, check one of the boxes for the type of corporation. Most small businesses in Canada should check box 1 for Canadian Controlled Private Corporation.
- On page two of Schedule 200, check the schedules that apply (see basic forms and tax schedules above)
- On page three ‘Additional Information’, you should check ‘no’ to IFRS, check ‘no’ to inactive and check either ‘yes’ for first time filers or ‘no’ for repeat filers.
- On box 284 of page 3, the description of the services or goods sold by the corporation must be entered.
- The rest of schedule 200 [pages 4 to 8] is used to calculate tax. TCCI (which is a Canadian controlled private corporation) is entitled to the small business deduction for $19,465 (i.e. net income for tax purposes multiplied by 17%)
- The base amount of Part I tax for TCCI is $43,510 and this amount is entered on box 550. The base amount of Part I tax is calculated by multiplying net income for tax purposes by 38%.
- After the reduction for the small business deduction and the federal tax abatement from the base amount of Part I tax, TCCI has Part I tax payable of $12,595 (box 700)
- On the last page of Schedule 200 (page 8), the provincial tax from Schedule 5 is entered on box 760. TCCI has provincial and territorial tax payable of $5,721.
- TCCI has a total balance owing (federal Part 1 tax payable for $12,595 plus provincial and territorial tax payable for $5,721) of $18,316.
- On the very bottom of page 8 the corporation’s name, address, and telephone number, are reported. You must sign and date the corporation income tax return in the same area.
About the Author – Allan Madan
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
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