As a small business owner, you are probably wondering, “Can I prepare and file my corporate taxes in Canada?” Does it make sense to hire an accountant, or is filing your corporate tax return an easy task?
In short, YES, you can prepare your corporate tax return, and file it with the CRA. There is no requirement to have an accounting degree or experience to do it. So if you want to do it yourself for free, follow this article to get more details about preparing your T2 tax return and filing it with the CRA.
Why do business owners want to prepare their corporate taxes themselves?
Before going into the details of how to prepare your corporate taxes, let’s try to understand why business owners would want to do so. The primary reason is to save money on accountancy fees.
While paying for tax services is not the most significant business expense, some business owners may do it themselves. Nobody knows your business better than you, and you might even have some bookkeeping experience. Therefore, it is possible to figure out what forms you need to fill out to file with the CRA. Still, you need to understand that corporate tax returns are much more complex than personal income tax, so the chances of you making mistakes are much higher.
Filing your T2 tax return also makes sense if you have an accounting degree, and have experience doing it in the past. In this case, you are already familiar with the process, and it does not make sense to hire extra help.
Just make sure there is no conflict of interest here. You may know your business well enough to cut a few corners and try to avoid paying taxes where you should not. This may result in an audit, and paying fines to the CRA. On the other hand, once your business grows, and you consider it your primary income source, you should hire a professional who can help with the taxes. This not only minimizes the chance of errors, but a professional accountant knows what extra credits you can apply and all the expenses you can claim in your tax return.
How much does it cost to prepare a corporate tax return?
When deciding if you want to hire an accountant or prepare your corporate taxes yourself, price is the primary factor. So how does a corporate tax return cost?
There are two types of corporate tax returns:
- The first is called the “Nil tax return,” and it is prepared when a company does not have any activity. You can learn more about nil tax returns from our blog post, and it would cost you around $250 per return.
- The second is a regular tax return for active companies with income and expenses. An average small business owner can expect around $1,700 per return. Still, it all depends on the number of transactions they have, and how much time the accountant will spend on bookkeeping and tax return preparation.
Should you hire an accountant if you can afford it?
Once you know how much a tax return costs, it is much easier to make a decision. If you can’t afford it, your only other option is to do it yourself.
However, if you’re still not confident you can file a return yourself accurately, my only advice to you would be to hire an accountant to do it for you.
Unlike the personal tax return, which is relatively simple and can be prepared by somebody without an accounting degree, corporate taxes are much more complex. If you try to file your own taxes, even though you have no experience, this might result in many costly mistakes which you can avoid. But if you still want to do it yourself, at least purchase software that can do some basic checks for mistakes.
Preparing corporate tax return on paper
Instructions to prepare Corporate Tax Return T2
Once you decided to prepare your corporate tax return yourself, you are going to need some instructions on how to do it. The CRA already has a very detailed tutorial, called the T4012, or “T2 Corporation – Income Tax Guide 2020,” explaining every line and providing many examples of how to fill it out. You can download this guide from our website.
What forms do you need to fill out?
You need to submit your corporate income tax return (T2) with the Canada Revenue Agency (CRA) every year. The T2 form is an editable PDF document, and it is nine pages long. You can download the form from our website.
If a corporate income tax return is sent electronically by someone other than a representative of the company, an authorized signing officer of the corporation must complete and sign a Form T183CORP.
You will need to attach your corporation’s financial statements by filling out specific schedules required by the CRA. They all have names to help you understand them. Speaking of financial statements, you must also file a General Index of Financial Information (GIFI) with your tax return. The Index reports information from the corporation’s income statement, balance sheet, and retained earnings statement (your financial statements).
You also may need to prepare other T2 Returns and Schedules, depending on your corporation’s operations. The actual list of schedules is very long, and you don’t need to file each of them. For example, if you didn’t make any charitable donations, you don’t need to fill out the T2SCH2 Charitable Donations and Gifts schedule.
The most common schedules to fill out include:
- Schedule 24 – First-time Filer after Incorporation
- Schedule 100 – Balance Sheet Information
- Schedule 125 – Income Statement Summary
- Schedule 3 – Dividend Received, Taxable Dividend Paid, and Part IV Tax Calculation
- Schedule 50 – Shareholder Information
- Schedule 8 – Capital Cost Allowance
- Schedule 1 – Net Income for Tax Purposes
- Schedule 11 – Transactions with Shareholders, Officers or Employees
- Schedule 200 – T2 Corporation Income Tax Return
- Schedule 88 – Internet Business Activities: if your corporation has a website and earns money from it, you need to fill out this form.
There is also a “T2 Short Return,” which is a simpler version of the T2 return and can be used if your corporation does not have any activity. You can learn more about a “Nil tax return” here.
Where to send your T2 return?
Once you have your tax return ready, you need to send it to the CRA. The address where you have to send your tax return depends on your location. Currently, there are three tax centers in Canada that accept paper tax returns: Winnipeg, Sudbury and Summerside. For example, if you are in Toronto, your tax center is in Sudbury, ON, but if your business is registered in Kitchener, you have to send it to Summerside, PEI. You can find the exact address on the CRA website.
Accounting Software to Prepare your corporate tax return
What software can you use to prepare a corporate tax return?
If you want to have a $0 investment in tax return preparation, you can use the calculator and fill out a paper version of the tax return, but that is not the best way to do it. There are professional software suites that can help you. Just make sure the software you are going to use is certified by the CRA. You can find all accounting software certified by CRA on this page.
The software we use at Taxory to prepare corporate taxes
Most of our accountants use Intuit ProFile, a professional software designed specifically for accountants. If you decide to hire an accountant from our company, that is the software we will use. It provides a lot of functionality, has all the forms required by the CRA, but maybe too complex for a small business owner. Intuit ProFile is also pretty expensive; the license costs $2,000+ per year. The more affordable options are Turbotax for business, which costs less, but you still have to pay at least $250 per return.
Is there free software that can file your corporate income taxes?
When filing your personal income taxes, there are many free or pay-as-you-want options. Unfortunately, there are limited software options to file corporate tax returns, and all of them are paid versions. You can find out which software options are accepted by the CRA on the CRA website.
Should you purchase software to use once a year, or is it better to hire a professional accounting firm?
Most business owners prefer to hire a professional accounting firm to file their corporate income taxes because it ends up being less expensive in the long run, and saves you time. The corporate income tax return process is considerably more complicated than a personal income tax return, which is why hiring an accounting firm is recommended. Plus, you get peace of mind knowing it is done correctly, and that you didn’t miss anything. If you are not a trained professional in taxes, and don’t know the tax laws, your corporate income tax should be at least reviewed by a professional accountant. Professional tax and accounting experts know of additional tax credits your business can take advantage of, and you may end up receiving a larger return.
When to file a corporate income tax return
Tax years are different for corporations than they are for individuals. The corporation’s tax year is its fiscal period, so you have to file and pay corporate income tax when your corporation’s fiscal period ends. Timing-wise, you need to file your corporate tax return no later than six months after the end of your tax year. However, if you end up owing taxes, you have to pay them no later than 3 months after the end of your fiscal year. That means within the three months following your tax year-end, you should figure out if you have a net income or a net loss.
It’s also essential to file your return on time to avoid penalties. If you are late, you might have to pay an additional percentage of your unpaid tax as a penalty, which can add up quickly. It’s best to have a separate saving account to which you contribute funds to pay taxes later, so you always have the money on hand. If you didn’t submit your return on time, do so no later than three years after the end of the tax year if you want to get your tax refund.
What business records do you need to file your corporate income tax?
As you might know, record management is essential when running a business. A short list of items you might need include:
- Payroll information
- financial statements
- asset additions or disposals
- receipts for expenses and purchases
If you work from home, you might need to keep business-use-of-home details. You will need them for your tax return, whether you do it yourself or an accountant does it.
You will also need:
- Invoices you received
- GST/HST return information
- previous year’s tax returns
- a copy of your incorporation papers
- accounts receivable and payable
- the latest notice of assessment
- a fixed asset continuity schedule
- employee deduction payable
What else do you need to know to file your corporate tax return?
If you are a corporation with gross revenue of more than $1M per year, the CRA made it mandatory to file the corporate income tax online for such corporations, so ensure you are doing that.
You also need to be very familiar with the General Index of Financial Information (GIFI), which helps collect and process financial information by assigning cash and deposits.
Whether you file the corporate tax yourself or through a firm, remember to keep your records for at least six years in case CRA needs to verify the information provided. Also, if you incurred a loss, didn’t make a profit or made less than $5,000, you still need to file your corporate taxes.
As you see, while it is possible to prepare your corporate taxes, that is not recommended. The number of mistakes you made will negate all the savings of doing it yourself. You may trigger a CRA audit and, in the end, spend much more time than expected.
Hire a professional to prepare your corporate taxes!
We suggest hiring a professional accountant who has both knowledge and experience in filing corporate taxes. Feel free to reach out to our company. We will be happy to answer all your questions and help you with corporate taxes and your personal income tax return.