The T2 filing requires a lot more paperwork than a personal return, and it's considerably more expensive.sturti/iStockPhoto / Getty Images
Roughly two million Canadian incorporated businesses will file a corporate tax return (T2) this year, with the majority coming through this month, according to the Canada Revenue Agency.
Greg Loskutov, chartered professional accountant (CPA) at Omega Squared Professional Corp. in Toronto, calls T2 returns “a completely different beast” to the standard T1 personal income tax filings.
T2 filings require a lot more paperwork, including financial statements, balance sheets and supporting schedules relating to shareholders, assets, liabilities and other corporate activities.
“As a corporation, you have to maintain a completely separate set of books,” Mr. Loskutov says. “You need to worry about assets, liabilities and equity. Your financial statements flow directly into the tax return, while with a personal tax return, you just need your income, deductions and expenses.”
T2 filings are due six months after the end of a corporation’s tax year – June 30 for most of Mr. Loskutov’s clients, who have a Dec. 31 fiscal year end.
But while tax returns don’t have to be filed for six months, income taxes are often due two to three months after a corporation’s year-end, depending on the corporation’s circumstances, Mr. Loskutov says. He notes this adds another layer of complexity as interest accrues for those who pay late.
Mr. Loskutov says most of his incorporated clients estimate their tax liability and pay within three months, filing the tax forms later. He starts nudging clients about what they need to do in early January, with reminders continuing until taxes are due and then until the filing deadline.
“If you overpay, you get a refund,” he says. “And if you underpaid, you top it up later [with interest].”
First-time filers
Mr. Loskutov added around 200 new professional corporations as clients this year, and he says the first T2 can feel overwhelming.
“We try to prepare them, but it’s one thing to know about it and another thing to actually deal with it,” he says.
The fees alone can be a shock; he charges, on average, $3,500 to $4,000 for a T2, while a personal tax return may only cost around $700.
Jordan Novack, CPA, founder and managing partner at Novack CPA in Toronto, says newly incorporated owners are often so busy running the business that they fall behind with tax filing.
“While incorporation gives you structure, it also creates obligations,” he says. “If bookkeeping, tax deadlines, HST, payroll and shareholder compensation are not managed early, the owner can end up months behind without realizing it.”
Mr. Novack says the first thing owners should do after incorporating their business is to separate personal and corporate finances, followed by monthly bookkeeping. They also need to understand whether they need HST or payroll accounts and figure out how to draw their compensation, whether by salary, dividends or a mix.
Record-keeping is where many newly incorporated owners miss the mark, he adds.
“The real value of proper accounting early on is not just filing a tax return,” he says. “It’s helping the owner get out of the weeds and understand what’s actually happening in the business.”
Worth the headache
Despite the complexity, Mr. Loskutov says, clients come to realize “the administrative burden is worth the tax savings.”
For instance, Mr. Loskutov notes that a small business corporation’s tax rate is 12.2 per cent on the first $500,000 of earnings in Ontario. In comparison, he says, an Ontario employee would pay 54 per cent tax for every dollar of income they earn above $258,482.
“The business earns its income, pays expenses and the owner’s salary or dividends,” he says. “Whatever is left behind is the profit, which gets taxed at 12 per cent in the corporation.”
But compensation isn’t the only reason to incorporate, as owners ideally would leave some money in the corporation, Mr. Loskutov adds.
“If you can leave at least $30,000 a year in the corporation and invest it, it’s worth it,” he says.