Preparing corporate tax returns for Canadian clients can be an extensive undertaking. It is important to note that the Canada Revenue Agency (CRA) handles corporate returns separately/ differently from personal returns. So it is in your best interest, as a professional, to familiarize yourself with this return type should you have a corporate business client use your services.
This T2 Guide can help professional accountants and bookkeepers with their client tax filing needs. Here is what you need to know about your Corporate clients’ returns.
What is a T2?
The T2 Corporation Income Tax Returns are the tax forms associated with corporate businesses or companies that are incorporated and operate within any Canadian province or territory, minus Québec. Corporations that operate within Québec are also required to file the CO-17, Québec’s Corporation Income Tax Return, in addition to the T2 return.
To incorporate your small business means to legally separate your personal assets and liabilities from the businesses. People choose to incorporate to create “liability protection” from corporate creditors possibly assessing private assets. Accordingly, one needs to ensure they do not reflect “private assets” in the corporate domain or that “liability protection” from corporate creditors can be breached.
There are five corporation types in Canada that will use the T2 information return for their business.
Which Clients Will File a T2 Corporation Income Tax Return?
All incorporated businesses operating within Canada must file a T2 Return with the CRA. Corporations must file this 8-page tax form, with various schedules and other relevant tax forms to fulfil the company’s obligation to the federal government of Canada. Even some tax-exempt corporations and non-resident corporations must file this Corporate tax return with the CRA.
It is important to note that tax rules for Corporations can be different from the tax rules for individuals. Therefore, you cannot assume that Individual tax rules apply to Corporations and vice versa as this assumption can lead to errors in your clients’ returns.
T2 Short Return
Certain corporate clients will also need to file a T2 Short return. This 2-page tax return, with 3 associated schedules, is used to report losses or nil net income of the business throughout the tax year. The T2 Short Return should only be completed by specific corporations that meet the following conditions:
- The corporation is a Canadian-controlled private corporation (CCPC)
- The corporation has a nil net income or a loss in the concerning tax year
- The corporation possesses a permanent establishment in only one province or territory of Canada
- The corporation does not claim any refundable tax credits in the concerning tax year
- The corporation did not receive or pay out any taxable dividends
How to Prepare T2 Forms
When preparing T2 forms for your corporate clients, it is essential to note that income in a Corporation is subject to two levels of taxation. First, at the Corporate tax level, and second, at the shareholder level on dividends received from the Corporation.
This second level of taxation, at the shareholder level, IS ONLY assessed when dividends are actually or deemed to be paid to the shareholder. Therefore, often solely owned corporations obtain a “deferral benefit” by retaining excess profits inside the corporation as opposed to distributing these profits to shareholders. The cash remaining in the corporation also provides a funding source to finance corporate growth for the future.
General Index of Financial Information (GIFI)
Corporations must file a General Index of Financial Information when preparing Corporate tax returns in Canada. This General Corporate return illustrates the corporation’s current financial status to the CRA, allowing the government to electronically validate its tax information. The GIFI helps to categorize the information on the corporation’s income statement, balance sheet, and statement of retained earnings.
Most used T2 schedules
These various T2 schedules will help you illustrate your client’s corporate financial information to the CRA. Overall, some of the most important corporate tax forms and T2 return schedules that you will complete for your clients include the following list.
- T2SCH1 Net income (loss) for Income Tax Purposes – Almost all corporations will file this schedule, as it reconciles the accounting profit and tax profit of the corporation in the corresponding tax year. It accounts and adjusts for deductions, expenses, and other benefits needed to calculate the total taxable profits.
- T2SCH3 Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculation – This form should only be used for corporations that have paid dividends to shareholders or have received dividends from other businesses.
- T2SCH4 Corporation Loss Continuity and Application – You may or may not use this form for your clients, as it calculates the history of the corporation’s losses during its entire existence, applying both to capital and non-capital losses. This form is also used to request loss carryback to previous years.
- T2SCH5 Tax Calculation Supplementary Corporations – Use this form to account for the corporation’s revenue allocations in the province in which they are permanently established.
- T2SCH6 Summary of Dispositions of Capital Property – Any assets- including property, equities, and bonds- that have been sold or disposed of by the corporation in the specified tax year must be accounted for on this form.
- T2SCH7 Aggregate Investment Income and Active Business Income – This T2 schedule differentiates a corporation’s investment income from its active business income. As the tax rate differs between the two, they must be calculated separately. If the corporate client does not possess investment income, they do not need to file this form.
- T2SCH8 Capital Cost Allowance – This schedule is used to calculate the corporation’s “tax depreciation” (i.e. the Capital Cost Allowance, or “CCA”) of its depreciable properties. It is important to note that depreciation for accounting purposes is not deductible at a tax level, however, corporations are entitled to claim CCA deductions as determined by the CCA classes.
- T2SCH50 Shareholder Information – Although all Canadian corporations have shareholders, this T2 schedule is only filed if the corporation is privately held, and if any shareholders possess 10% or more of the common or preferred stock. List only the top 10 shareholders with the necessary information.
- T2SCH88 Internet Business Activities – All corporations that possess a web page or use a website that generates income, will need to fill in this form with the relevant information. Up to 5 URL(s) can be entered at this time. If the corporation has more than 5 websites, only list the highest income-generating sites.
- T2SCH100 Balance Sheet Information – This form clearly states the corporation’s assets, liabilities, shareholder equity, and retained earnings.
- T2SCH125 Income Statement Information – This form covers the corporation’s revenue and expenses, divided between farming and non-farming revenue and expense activities depending on the industry.
- T2SCH141 Notes Checklist – This form identifies to the CRA who prepared the corporate financial statements, including their qualifications as an accountant and their involvement in the corporation in question.
Learn more about helping your clients through the 2021 tax filing season.
What Are the T2 Return Deadlines?
Every T2 Corporation Income tax return must be filed no later than the six-month mark following the end of each tax year. However, the taxation year differs from company to company, as they must decide what their fiscal year will be within the first year of the business’s existence.
For example, if the corporation’s tax year ends on December 31st, then their deadline for filing the Corporate return would be June 30th. Typically, if an individual owns multiple companies, it is in their best interest to pick the same fiscal year and end date for all of them.
Therefore, discuss with your corporate clients to determine the taxation year their business follows to ensure the proper deadlines are met.
Where to Mail T2 Forms to the Canada Revenue Agency
In some cases, you will be able to mail your clients’ corporate returns to the Revenue Agency. Depending on the province and location the corporation operates out of, this will determine which tax centre mailing address to use.
However, corporations with annual gross revenues of $1 million or more are required to file their T2 Corporate returns online using internet filing as dictated by the CRA. Corporation internet filing using professional tax preparation software can make the process easier and quicker for everyone involved.
How to File T2 Returns
Using cloud-based professional tax preparation software can simplify your year-end workflow when filing your client’s Corporate returns. With Workpapers and Pro Tax built into QuickBooks Online Accountant, you no longer need to export and import files from one tool to another at year-end.
With client data already in QuickBooks, you can get started on year-end preparation faster. You can make adjustments, add attachments, GIFI mappings and create custom financial statements all from within QuickBooks using Workpapers. Then your data transitions seamlessly from Workpapers into Pro Tax where you can EFILE T2 tax returns.
Learn more about how to file T2s in QuickBooks Online Accountant using Pro Tax, or sign in to QuickBooks Online Accountant to try Pro Tax for free.
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