A Summary

This article summarizes the series released in late December 2024 about creating a beautiful year-end file. For further details, please be sure to revisit the original blog post series linked throughout this article.

Preparing for your corporate year-end can feel overwhelming. However, a well-organized file will save you time, money, and headaches. Therefore, this recap of our three-part series outlines the critical steps and considerations for a smooth tax preparation process.

Part 1: Setting the Foundation

Originally published December 17, 2024. Click the link here.

To begin with, clarify your requirements and prepare the essential corporate documentation before diving into the numbers.

1. Know Your Financial Reporting Requirements

It’s important to know your financial reporting requirements by reviewing all agreements with lenders or investors. These documents dictate the level of  financial statement engagement you must obtain:

• Compiled Financial Statements: This is the most basic and least expensive service. It involves presenting management’s financial information without providing any assurance. It’s often sufficient for general purposes.
• Reviewed Financial Statements: This offers a higher, limited level of assurance. The accountant performs inquiry and analytical procedures to ensure the statements are plausible, identifying potential misstatements.
• Audited Financial Statements: This is the most expensive and in-depth level, providing the highest level of assurance. Specifically, it’s often required by major lenders or equity investors due to the extensive internal control testing and external verification procedures involved.

Even so, remember that every business requires financial statements to be prepared annually, but not necessarily by an accountant.

2. Check Your Accountant’s Qualifications

Consequently, you must ensure your chosen accountant is a CPA in good standing with their governing body and works for a registered CPA firm. Luckily, these credentials can be checked on the CPA website. Furthermore, if you require an audit or review engagement, they must possess a valid public accounting license.

3. File Informational Returns

In addition to financial statements and corporate taxes, you must file an annual informational return:

• Provincially incorporated: File with the province.
• Federally incorporated: File with Innovation, Science and Economic Development Canada.

Note: Failing to file annually can risk your business being dissolved.

4. Update Your Corporate Record Book

This is a legal requirement and a common small business deficiency. The corporate record book holds answers for your informational return and key information for your accountant. Thus, ensure it is updated annually to include:

• Up-to-date lists of all Shareholders, Directors, and Officers.
• Signed Annual meeting minutes documenting important decisions.
• Records of any major events or new agreements entered into by the corporation throughout the year.

5. Record Major Events

Finally, discuss any major corporate events with your accountant immediately. Many of these actions require additional tax filings or formal motions and resolutions to be recorded in your minute book.

Key events that require immediate consultation include:

• Change in Control: Any merger, acquisition, or change in the majority shareholder.
• Capitalization Changes: The issuance of new shares or the declaration of dividends.
• Leadership & Ownership Changes: Updates to the roster of directors, officers, or shareholders.
• Structural Amendments: The sale of assets or major amendments to articles or by-laws.

Part 2: Focus on the Balance Sheet

Originally published December 26, 2024. Click the link here. here.

The Balance Sheet is where tax accountants spend most of their time preparing the T2 Corporate Tax return. Therefore, quality control starts with thorough reconciliation of key accounts.

1. Reconcile Cash and Credit Cards

All banks and credit cards must be reconciled.

• Verification: First, verify that all bank and credit card statements precisely match your internal bookkeeping records.
• Investigate Discrepancies: Promptly address and enter any missing transactions that appear on your statements but not in your general ledger.
• Review and resolve any “hanging” transactions—entries in your books that have not yet cleared on the bank statements. Any item outstanding for more than 6 months (such as stale-dated cheques) requires immediate investigation and correction to clean up your balance sheet.

2. Review Receivables and Payables

Use the AR and AP Aging Summary Reports to review balances at the customer or supplier level.

• Validate Balances: Confirm that report totals are logical. For instance, the balance in your Accounts Receivable account should not be equivalent to your annual revenue.
• Invoice & Bill Matching: Ensure every received payment is perfectly matched to the correct outstanding invoice, and every payment made is matched to the correct vendor bill.
• Proactive Collection & Payment: Actively collect on old, overdue customer invoices to boost cash flow. Similarly, pay off old vendor bills to ensure strong, long-term supplier and vendor relations.

3. Understanding Write-Offs and Bad Debt

• Payables Write-Off: Writing off an overdue bill decreases your expenses, resulting in higher net income and increased taxes. Before writing it off, ensure the bill is not a duplicate or determine if it was paid personally by a shareholder/employee before writing it off.
• Bad Debt (AR Write-Off): Writing off an uncollected invoice creates a bad debt expense. You must document your collection efforts or have evidence that the debt is uncollectible to prove this to the CRA.

4. Accrual Basis Accounting

Almost all Canadian businesses must use the accrual basis of accounting. If you don’t know what this means, you should be working with a professional who does. Revenues and expenses must be recorded in the period they occur, which requires tracking. Consequently, you should not just be looking at bank and credit card statements in a vacuum – this is cash-based accounting:

• Prepaid Expenses or Assets: Expenses paid now but relating to a later period (e.g., half of an annual insurance policy that crosses your year-end, security deposits, inventory in transit).
• Accrued Liabilities: Expenses incurred but not yet billed (e.g., estimates for legal or accounting fees).

    Provide your accountant with a schedule (breakdown of the final balance) for these accounts.

5. Inventory and Fixed Assets

•   Inventory: Regularly perform a count. Inventory must be recorded at cost and cannot be a negative balance.  Be sure to impair (write down) any items that are spoiled, obsolete, or no longer worth what you paid for them.
•   Fixed Assets (Property, Plant, Equipment): Assets over a certain cost threshold that provide value for multiple years. Therefore, they are also expensed over time, not all at once. Keep a Fixed Asset Register (list with item name, cost, acquisition date, etc.) and a Continuity Schedule for tracking depreciation/amortization.

6. Loans (Intercompany and Shareholder)

•   Loans (General): Reconcile all loans (payable/receivable) to recognize interest properly. Split the loan into **current portion** (due in the next 12 months) and long-term portion.
•   Shareholder Loans: If a shareholder owes the corporation for more than one year, the CRA can force the loan into the shareholder’s income, potentially resulting in double taxation. Pay it back within one year or consult your accountant about bringing it into personal income.
•   Avoid Entanglement: Keep business and personal finances separate to avoid unnecessary complications and fees.

Part 3: Navigating the Income Statement

Originally published January 7, 2025. Click the link here.

The Income Statement (Profit and Loss) shows how much money is coming in and going out. However, it’s crucial to ensure every line item is appropriately documented for tax purposes.

1. Revenue

Separate your revenue into two types, as they are taxed differently:

•   Active Revenue: Generated by direct activity (e.g., selling products or services). Be mindful of the customer’s location for correct sales tax charges.
•   Passive Revenue: Generated without direct action (e.g., royalties, licensing fees, investment income). In general, this is  taxed at the highest personal tax rate equivalent.

2. Cost of Sales vs. Overhead Expenses

•   Cost of Sales: This should only include items directly related to generating sales.
•  Overhead Expenses: These are costs incurred regardless of sales volume (e.g., rent, utilities). Avoid putting overhead costs in Cost of Sales, since this can result in margins that raise CRA scrutiny.

3. Scrutinized Expense Categories

The CRA often reviews the following areas, consequently requiring specific documentation:

• Legal, Accounting, and Professional Fees: Therefore, your tax professional should review all invoices to ensure expenses are not personal or related to another corporation.
• Meals, Entertainment, and Gifts: Must have a clear business purpose (acquiring new business, deepening relationships). You must document on the receipt (or in a tied-in schedule).
  • Meals & Entertainment: Who you met with and the purpose of the meeting.
  • Gifts: Who received the gift and their contact information. Be aware that gifts to team members may be a taxable benefit.
• Vehicle Expenses: A mileage log is an administrative requirement and a lack of one can result in the denial of all vehicle expenses. The log must show the date, departure/arrival address, reason for the trip, and kilometers driven. Additionally, ensure the vehicle is either owned by the corporation, or the individual owner is charging back the corporation at the CRA-prescribed rate for business usage.

4. Non-Deductible Expenses

For accurate tax filing, separate any non-deductible expenses into distinct categories within your books. 

Non-deductible items includes:

• Penalties and interest charges levied by the CRA (Canada Revenue Agency).
• Fines issued by the Ministry.
• Moving violations, such as speeding and parking tickets.

The Bottom Line

Good books and records are essential. There is no level of engagement where an accountant reviews every transaction—the person signing the tax return is ultimately responsible for its accuracy. Ensure your books are up to date, you have appropriate documentation, and you maintain a relationship with a qualified tax professional.