Financial Statements Required for T2 Filing in Canada

Preparing a Canadian corporate income tax return involves more than calculating taxable income and applying the appropriate tax rates.

Before a T2 return can be completed, the corporation must establish a complete and reliable picture of its financial position and operating results for the year. These financial statements and accounting records form an essential part of the broader corporate tax return filing process in Canada.

For most corporations, the Canada Revenue Agency requires financial statement information to be submitted through the General Index of Financial Information, commonly known as the GIFI.

This does not necessarily mean that a PDF copy of signed financial statements must be attached to the return. When a T2 is filed electronically, financial statement amounts are normally incorporated directly into the return using GIFI codes.

What Financial Information Is Generally Required?

A typical Canadian corporation will normally need:

• A year-end balance sheet
• An income statement for the tax year
• Retained earnings and dividend information
• Financial statement notes, if any were prepared
• Information about the person who prepared or reported on the financial information
• An opening balance sheet for the corporation’s first T2 return

This information is generally reported through GIFI Schedules 100, 101, 125, 140 and 141, as applicable. Business owners should also review the complete list of documents required for a T2 return before beginning the year-end filing process.

What Is the GIFI?

The GIFI is a standardized list of financial statement codes used by the CRA.

Each common financial statement item is assigned a code. Cash, accounts receivable, inventory, equipment, sales and office expenses are examples of items that have their own GIFI codes.

The CRA generally expects corporations, other than certain insurance corporations, to report their financial statement information using the GIFI. The level of detail should normally be similar to the detail contained in the corporation’s traditional financial statements.

The GIFI is not a separate accounting method. It is a reporting system used to convert the corporation’s financial statements or adjusted trial balance into the standardized format required for the T2 return.

1. The Corporation’s Balance Sheet

The balance sheet reports the corporation’s financial position at the end of its tax year.

For T2 filing purposes, balance sheet information is generally reported on Schedule 100 – Balance Sheet Information.

Assets

Assets may include:

• Cash and bank accounts
• Accounts receivable
• Inventory
• Prepaid expenses
• Investments
• Advances to related corporations
• Land and buildings
• Vehicles, equipment and other capital assets
• Accumulated depreciation

Liabilities

Liabilities may include:

• Accounts payable
• Credit card balances
• Accrued salaries and vacation pay
• Sales taxes payable
• Payroll deductions payable
• Income taxes payable
• Bank loans
• Mortgages
• Amounts owing to shareholders or related corporations

Shareholders’ Equity

Shareholders’ equity will commonly include:

• Share capital
• Contributed surplus, where applicable
• Retained earnings
• The current-year profit or loss
• Dividends declared

Schedule 100 should reflect the financial position of the legal entity filing the T2 return. The CRA generally requires unconsolidated financial information for each corporation, even when several corporations belong to the same corporate group.

2. The Income Statement

The income statement reports the revenue earned and expenses incurred during the corporation’s tax year.

This information is generally reported on Schedule 125 – Income Statement Information.

The income statement may include:

• Sales or professional fees
• Rental revenue
• Interest and dividend income
• Gains or losses on the sale of assets
• Cost of goods sold
• Salaries and employee benefits
• Rent
• Office expenses
• Professional fees
• Vehicle and travel expenses
• Interest expense
• Insurance
• Bank charges
• Accounting depreciation
• Other operating expenses

Accounting income is not always the same as taxable income.

Some accounting expenses may be non-deductible or only partially deductible for income tax purposes. The accounting profit is therefore adjusted in the T2 return, primarily through Schedule 1, to determine net income for tax purposes.

3. Retained Earnings and Dividends

Retained earnings represent the corporation’s accumulated profits that have not been distributed to its shareholders.

The ending balance is generally calculated as follows:

Opening retained earnings
+ Current-year net income
− Dividends declared
± Other adjustments
= Closing retained earnings

This continuity is important. Opening retained earnings should normally agree with the closing balance reported for the previous year, unless there has been a valid prior-period correction or another documented adjustment.

Dividends must also be properly recorded. A dividend is generally not an operating expense of the corporation. It is a distribution of corporate earnings to its shareholders.

4. Schedule 141 and Notes to the Financial Statements

Schedule 141 – GIFI Additional Information provides information about the person primarily involved with the financial information and the extent of that person’s involvement.

It may identify whether the financial information was subject to:

• An audit
• A review engagement
• A compilation engagement
• Another form of preparation or involvement

Schedule 141 also provides information about financial statement notes and the person who prepared the T2 return.

Schedule 141 generally has to be completed even when no notes to the financial statements were prepared.

When financial statement notes or an auditor’s or accountant’s report have been prepared, the applicable information should be included with the return, including through the GIFI section of the tax software when filing electronically.

5. The First T2 Return of a New Corporation

A corporation filing its first T2 return may have additional financial reporting requirements.

Schedule 101 – Opening Balance Sheet Information reports the corporation’s financial position at the beginning of its first tax year.

Depending on how the corporation was created, additional information may be needed, including:

• Details of shares issued for consideration other than cash
• Agreements relating to property transfers
• The closing balance sheet of a sole proprietorship or partnership transferred to the corporation
• The closing balance sheet of a predecessor corporation
• Information about liabilities assumed by the new corporation

The CRA indicates that this information may be required where the corporation acquired a business, assets or liabilities from a previous entity.

6. Does an Inactive Corporation Need Financial Statements?

An inactive corporation generally continues to have a T2 filing obligation until it is formally dissolved.

However, a corporation that was inactive throughout the entire tax year and has no balance sheet or income statement information to report may not have to attach Schedules 100, 125 and 141. The CRA will still accept the schedules if they are filed.

The word “inactive” must be used carefully. A corporation may have no active business operations but still have:

• A bank account
• Bank charges
• Interest income
• Investments
• Shareholder loans
• Professional fees
• Assets
• Liabilities

A corporation with any of these items may still have financial information that must be reported.

7. Must the Financial Statements Be Prepared by a CPA?

For CRA filing purposes, the central requirement is that complete and reliable financial statement information be reported through the GIFI.

Filing a T2 return does not automatically mean that the corporation must obtain an audit, review engagement or compilation engagement.

Schedule 141 recognizes different levels of involvement in preparing financial information and asks whether an auditor’s or accountant’s report was prepared. The tax reporting framework therefore accommodates financial information prepared under different circumstances.

CPA-prepared financial statements may nevertheless be required by:

• A bank or lender
• An investor
• A minority shareholder
• A regulatory body
• A potential purchaser
• A shareholders’ agreement
• A landlord or major supplier
• A government funding program

A compilation engagement, review engagement and audit are separate professional services from preparing a corporate income tax return. The appropriate service depends on the needs of the financial statement users, not only on the requirement to file a T2.

8. Can a T2 Be Prepared From a Trial Balance?

A properly prepared trial balance can be the starting point for preparing the financial statements and T2 return.

The trial balance should, however, be reviewed and adjusted before the amounts are mapped to GIFI codes. The year-end accounting process may need to address:

• Bank reconciliations
• Accounts receivable and payable
• Accrued expenses
• Prepaid expenses
• Inventory
• Capital asset purchases and disposals
• Accounting depreciation
• Shareholder loans
• Dividends and bonuses
• Sales taxes
• Payroll deductions
• Related-party transactions
• Corporate income taxes

An unadjusted trial balance may result in an unbalanced balance sheet, incorrect retained earnings or net income that does not fairly reflect the corporation’s activities.

Completing these adjustments is an important part of learning how to prepare a T2 corporate tax return accurately.

9. Documents to Provide to the Accountant

Although the CRA primarily receives GIFI information, the accountant needs sufficient supporting documentation to prepare reliable financial statements.

Depending on the corporation’s activities, the required documents may include:

• The trial balance
• The general ledger
• Bank statements and bank reconciliations
• An accounts receivable listing
• An accounts payable listing
• Year-end inventory information
• Credit card statements
• Loan agreements and mortgage statements
• Investment statements
• Invoices for capital asset purchases
• Details of assets sold or disposed of
• GST/HST and QST returns
• Payroll reports
• Payroll remittance records
• Shareholder loan details
• Dividend resolutions
• Information about associated corporations
• Prior-year financial statements and tax returns

The exact documentation will depend on the industry, size of the corporation and quality of its bookkeeping records.

10. Must PDF Financial Statements Be Attached to the T2?

When the T2 return is filed electronically, the corporation generally does not submit paper copies of its financial statements. The financial information is incorporated into the return using GIFI codes.

If financial statement notes or a professional report were prepared, the related information can be transmitted through the appropriate section of the T2 software.

The corporation should still retain:

• Its final financial statements
• The adjusted trial balance
• Year-end adjusting entries
• Financial statement notes
• Supporting documentation
• Reconciliations and calculations used to prepare the return

After the financial information has been finalized, the corporation can proceed through the applicable corporate tax filing process.

11. Is a Cash Flow Statement Required?

For a typical private corporation, the standard T2 GIFI schedules primarily cover the balance sheet, income statement and additional financial information.

The CRA’s list of standard corporate GIFI schedules does not include a separate cash flow statement schedule.

A cash flow statement may still form part of financial statements prepared for a lender, investor or other external user. It may also be useful to management even when it is not directly required to complete the T2 return.

12. Common Financial Statement Errors in T2 Filings

Common problems include:

• Preparing an income statement without a balance sheet
• Using the bank statement balance without completing a bank reconciliation
• Omitting accounts receivable or accounts payable
• Recording equipment purchases as regular operating expenses
• Failing to report shareholder loans
• Recording dividends as expenses
• Failing to carry forward retained earnings correctly
• Combining several corporations in one T2 return
• Using consolidated figures instead of the legal entity’s own financial information
• Omitting transactions between the corporation and its shareholders
• Filing from incomplete or unadjusted accounting records

These errors can affect taxable income, corporate tax accounts, available dividends and the reliability of financial statements provided to lenders or other users.

Conclusion

The financial statements required for T2 filing involve much more than a total of the corporation’s revenue and expenses.

In most cases, the corporation should be able to provide:

• A complete balance sheet
• An income statement
• Retained earnings continuity
• Dividend information
• Financial statement notes, where applicable
• Accounting records detailed enough to be mapped to the GIFI

Keeping the bookkeeping current and completing a proper year-end closing process makes the T2 filing more efficient, reduces the risk of errors and produces financial information that is more useful to the business owner.

T2Online.ca assists Canadian corporations with reasonably organized accounting records, an adjusted trial balance or existing financial statements to complete their T2 return and, where required, obtain CPA-prepared financial statements under a compilation engagement.

Frequently Asked Questions

Is a Balance Sheet Required for a T2 Return?

Most active corporations must report balance sheet information through Schedule 100 or the GIFI section of their T2 software. An inactive corporation with no financial information to report may be exempt from certain schedules.

Can a T2 Return Be Prepared Using Only Bank Statements?

Bank statements do not show accounts receivable, accounts payable, capital assets, liabilities, shareholder loans and many other balance sheet items. They may support the accounting records, but they do not replace complete bookkeeping.

Does a Small Corporation Need Financial Statements?

A small corporation generally needs sufficient financial information to complete the GIFI. Its statements may be relatively simple, but its assets, liabilities, revenue, expenses and shareholders’ equity must still be determined correctly.

Do the Financial Statements Have to Be Audited?

The CRA does not automatically require an audit because a corporation files a T2 return. An audit or review engagement may still be required by a lender, investor, agreement, legislation or regulatory body.

What Is the Difference Between Financial Statements and the GIFI?

Financial statements present the corporation’s results in a format designed for management, shareholders and other users. The GIFI converts the same information into standardized codes used by the CRA.

Does a Corporation With No Revenue Need Financial Statements?

Possibly. A corporation with no revenue may still have a bank account, expenses, investments, debts, assets or shareholder transactions. It would then have balance sheet or income statement information to report.

This article provides general information and is not a substitute for tax or accounting advice based on the corporation’s specific circumstances.