“By failing to prepare, you are preparing to fail”
Benjamin Franklin
What kind of year-end service do you need?
Understanding the type of year-end engagement you require and the deadline are the first steps in determining your year-end responsibilities.
Requirements are different for assurance engagements such as audits or reviews. We suggest that businesses try to “audit-proof” themselves ahead of time and stay “audit-proof” on an ongoing basis. KATA Accounting Solutions Professional Corporation doesn’t perform audit or review engagements.
Still, we understand the differences and some areas you need to know before signing an agreement or engaging an accountant.
Regulations and Funding Agreements
Depending on the nature of your business, you may need to have a specific level of assurance engagement. Some businesses rely heavily on government funding, and often, this funding comes with reporting requirements, deadlines and a requirement for a certain level of assurance.
For example, daycares moving to the $ 10-a-day childcare program (and it is optional for these organizations) are required to produce Audited Financial Statements within four months of the fiscal year-end. This means that everything needs to be ready to go to have enough time for the bookkeeper and the auditor to do their work. Be sure to consult with your financial team about timeline requirements and expectations, and have your part completed by the agreed-upon deadline. It’s vital to ensure no disruption of funding.
Legislative Requirements
Some organizations, such as charities, are legally required to have a certain level of assurance work performed once they hit specific revenue amounts.
Ensure you understand the legislative and regulatory environment in which your organization operates and have your financial team – and budget – in place well ahead of time. This will help you prepare and complete the required processes with minimal friction.
Grants, Subsidies and Lending Agreements
Some grant, subsidy and lending agreements require specific timelines and levels of assurance.
These requirements usually depend on the third party and the amount involved. For instance, a lender of a specific lower dollar amount may require Compiled Financial Statements within three months of the fiscal year-end, while the same lender may require Audited Financial Statements within four months of the fiscal year-end for lending your business a higher dollar amount.
Be sure to review your agreements carefully to understand what you need and by when. This should be done BEFORE signing the agreement, as costs will escalate when higher levels of engagement are required – and you’ll need to budget for them.
Shareholder and Stakeholder Agreements
Similar to lender agreements, some shareholder and stakeholder agreements may come with additional compliance requirements, particularly in start-ups. Beyond assurance engagements with accountants, this may include impact statements or other reporting requirements. Know what you’re getting into before signing anything, and plan accordingly.
What are your year-end compliance responsibilities?
Review your Agreements
The previous sections of this article speak about agreements and how they may affect your reporting deadlines. Know what you’re getting into before signing any agreements, understand how they’ll affect your obligations, and plan if this affects your business.
Standard Requirements
The following are standard compliance requirements and deadlines. Remember that any agreements you enter may adjust or accelerate requirements and deadlines.
Tax Payments
Businesses should be paying tax installments throughout the year. Estimates of these installments and their deadlines are listed on last year’s tax return. Remember that if your business is more or less successful than the prior year, you may need to adjust the amount of your installments.
Installments are generally due on the 15th of each month.
Corporations’ final tax payment is due two months after your fiscal year ends. If your corporation qualifies, your final tax payment may be extended until three months after the fiscal year-end. The final tax payment for self-employed individuals is due April 30th, along with everyone else.
CRA will charge installment interest if you should have made installments and didn’t. They will also charge penalties and interest if the final taxes owing exceed the payments made. The penalty is based on the number of late outstanding taxes.
Suppose you overpaid your taxes, which is hopefully the situation. In that case, you can carry forward the credit to the following fiscal year, have the credit transferred to another CRA program account, or have it refunded.
Penalties and interest stemming from missing installment payments or paying taxes late are the top way businesses (and individuals) pay more tax than necessary. Oh, and CRA penalties and interest are not tax-deductible.
Tax Filing
Corporations must file their T2 Corporate Income Tax return within six months of their fiscal year-end. If they have entered a Compilation, Review or Audit engagement with an accounting firm, the notes from the financial statements will be included with the T2 return. This means they must be done in concert; you can’t do one without the other.
Self-employed individuals (and their spouses) must file their T1 Personal Income Tax return by June 15th.
Note that in both cases, the tax payments are due before the tax filing is due.
Financial Statements
Corporations must produce financial statements annually, but they don’t necessarily have to be prepared by an accountant. They must report their balance sheet and income statement on the T2 Corporate Income Tax Return.
Self-employed individuals have to report the activity of their income statement on their personal tax return on form T2125 but are not required to report a balance sheet.
If you’re engaging an accounting firm to prepare your financial statements, you’ll enter a Compilation, Review or Audit engagement.
There are no more “Notice to Reader Statements.” This standard changed in late 2021, and CPAs should not be producing them anymore.
Corporate Record Book
This must be updated annually.
We won’t get into much detail about this requirement, but please check our past post to understand what is in a corporate record book.
This is the one area businesses commonly need to be more compliant. Should you be audited in the future, the corporate record book will be required. It is the corporation’s legal responsibility to maintain this, and there may be fines or jail time if they don’t.
What information do you need to provide to your bookkeeper?
Documentation
Your bookkeeper needs the documentation that supports your business transactions.
A good bookkeeper, such as a Certified Professional Bookkeeper (CPB), will know exactly what to look for on these documents. They will need the sales invoices, sales receipts, bills, expense receipts, receipts, lease and lending agreements, mileage log books and other schedules that financially impact your business. They also need third-party statements from banks, credit card companies, investment companies, lenders, and payment gateways to ensure your books are as complete and accurate as possible.
A bookkeeper who enters everything from a bank or credit card statement is not doing their job appropriately (at least, not by Canadian standards).
A good bookkeeper watches the details to make sure that they are making appropriate sales tax ITC (internal tax credit) claims to minimize the amount of sales tax you need to remit to the CRA to make sure you have the supporting documents you need and to make sure that your documentation will be sufficient for a CRA review or audit.
Common problems
A few issues we’ve seen over the years include:
- Quotes or estimates are entered as bills. CRA requires proper bills and receipts from vendors. A good bookkeeper will know what to look for on these and should notify you if your supporting document is insufficient.
- Documents that aren’t in the name of the business. For instance, a vehicle on the corporation’s balance sheet needs to be owned by that corporation, not by another corporation or an individual. Also, legal invoices that are personal or belong to another corporation may be submitted.
- Bills being held back to make the financial results look better than they are.
- Corporations are required to use accrual-based accounting in Canada.
- No supporting document whatsoever. CRA will usually deny an expense completely if no supporting documentation can be provided.
Answers
A good bookkeeper is your first step to becoming “audit-proof,” but they can’t do it in a vacuum. Don’t keep them in the dark.
No matter how far ahead of things you think you are, your bookkeeper will have some questions for you. They’re asking because they need the answers to protect you and your business.
Having a good relationship with a bookkeeper and being proactive in communicating with them can help you get better financial results and pay less for your accountant’s year-end services.