Year-Ends & Incorporation Tax Filing in Quebec
For someone who has just started their business, it may be challenging to understand the steps to accounting, bookkeeping and taxes, as well as tax terminology. In this article, our focus will be to help clarify year-ends and incorporation tax filing in Quebec. Providing the main principles and steps that need to be followed in order to produce incorporation tax returns and financial statements.
Year-ends for incorporations are based on a 12-month cycle beginning from the date the company was incorporated. An example of this would be if a company has incorporated the business in the month of June, you would then count 12 months from that date to determine your year-end. In this case, the year-end would be the month of May. In most cases, first-time filers are able to select their company year-end. Generally, business owners will opt for the month of December in order to facilitate their filing and remain in one calendar year. In some cases, a company may want to change their tax year; generally, this requires approval from Revenue Quebec. In order to do so, the company must write a letter detailing the reason for their request. Also, if a company becomes bankrupt, it has to get approval to change its tax year.
Small Business Bookkeeping
Many businesses always remain on top of their game and have their bookkeeping done monthly or quarterly. This is done so that when the year-end comes, they are not overwhelmed with the process of having to complete a 12-month bookkeeping cycle when it’s time to close the year-end. When looking at business owners that have registered to file GST/QST remittances monthly or quarterly; tend have their books completed regularly since they have to honour the GST.QST filing deadline. This facilitates the workload during the year-end process since they are not forced to complete 12 months of bookkeeping at once. Some companies have registered to file their sales tax once a year, therefore, rather than completing their books monthly or quarterly, tend to wait until the year-end is close to due, and do their full 12-month cycle of bookkeeping. In a case in which a company is not required to file sales tax, some companies may wait until the end of the year to complete their bookkeeping for year-end and corporate tax filing purposes. Bookkeeping is best done regularly as opposed to 6 months or 12 months at a time since the activity of the business is fresh in the business owner’s mind, and transactions are recorded more accurately. Another reason it is not recommended to delay bookkeeping is so that receipts and invoices are not misplaced. Also,; some banks do not provide the option to obtain online credit card or bank statements after a 12-month term. Clients then have to request paper copies from the bank and pay a fee for these documents.
When taking this all into consideration, the choice remains a personal one to each company. This is unless a business has sales tax deadlines. One recommendation we offer to all of our clients is that they should have their books in order monthly or quarterly. This allows for ease when it comes time to complete year-end reports and corporate taxes; avoiding additional stress for both the business owner and their accountant. Another point to keep in mind is that if business owners wait until the 12 months are over before completing the books, the company activities, such as transfers, or any other type of transactions are no longer fresh in their minds. Unless the company retains extremely detailed records, they tend to forget what the transactions were for. When bookkeeping is done regularly, the business’ activities remain clear and organized, thus making the accounting more accurate.
Incorporation tax return for business
In Quebec, an incorporation tax return is known as a CO17. When you are incorporated in Quebec, and you practice business within the province, you are obligated to file a Federal Tax Return and Provincial Tax Return — also known as CO17 (provincial) and T2 (federal). These taxes are only prepared once the 12-month year-end is completed. An example of this is if a client chooses to incorporate in January, making December their year-end, then the books completed for this period need to be closed by December 31st of that fiscal year. If the deadline falls on a weekend day (Saturday or Sunday) or a public holiday, it will be considered filed on time if it is sent on the first business day after the filing deadline.
The following steps must be taken and completed before companies are able to file at the year-end. The bookkeeping must be completed, and all of the company’s accounts must be reconciled. All shareholder loans and payables must be accurately adjusted. Retained earnings and closings from the previous year-end and opened retained earnings amounts must be verified. Lastly, dividends must be accurate when closing the books to get ready for incorporation tax filing. Once all of the entries are completed, and bookkeeping is revised, edited and finalized, a profit and loss, a balance sheet and a trial balance are then exported from the bookkeeping software. If a business is opting out of using an accounting/bookkeeping software, they will need to produce all of these reports manually. The amounts recorded on the profit and loss sheet, as well as the balance sheet, must balance and reflect on the trial balance. This is what determines whether or not the figures balance.
In order for taxes to be produced, the client must provide the accounting firm or accountant some important information. Below is a list of the information required to do so.
- The corporation’s legal name
- Provincial or territorial jurisdiction (this must also provide a specific province jurisdiction or multi-jurisdiction)
- You must specify if the corporation is a Canadian resident (if no, give country of residence and complete Sch 97) *Sch 97 is additional information schedule for non-resident corporations that must file a Canadian tax return
- The tax year start date and tax year-end date
- You must specify if this is the first year of the corporation
- The date of incorporation
- If it is the final year of the corporation, you must provide the date of dissolution
- The Federal Business number (9 digits RC0001)
- The Quebec Enterprise Number (NEQ)
- Quebec’s identification number (10 digits IC0001)
- The address of the head office
- The mailing address (if it is different from the head office)
- The location of books and records
- You must specify if the corporation is inactive (even if the company is inactive or did not generate any revenue, it must still file for its fiscal year)
- You must specify the main product or service of the company (provide the percentage of each if more than one)
- The signing officer of the corporation (name, position, phone number)
- The eligibility for Canadian Controlled Private Corporation (CCPC)
- All shareholders that own more than 10% of the common and /or preferred shares
CO-17 Tax T2 Revenu Quebec Year Return
- Name of the shareholder
- Business number (if a company), S.I.N (if an individual), trust number (for trusts)
- Percentage of common or preferred shares owned
The above points are general information an accounting firm/ accountant will ask for from the client in order to be able to understand the company’s tax needs better and to file the returns.
The corporate tax software that is used depends on the accounting firm with which you are using to prepare your taxes. There are many incorporation tax software available. Your accountant or accounting firm will use the software best suited for your company tax requirements and needs. Although, most of these tax software’s produce the same tax returns meeting government requirements.
Once all entries are completed and the accounting firm has clarified all questions, they are then provided with the profit and loss sheet, the balance sheet and the trial balance. Once all of this information is obtained, they are then ready to begin the process of preparing the CO17 and T2 reports. With this, a signed and certified notice to the reader (which is also known as a financial statement) is produced and mailed out with tax returns to both government agencies (provincial and federal).
It is crucial for bookkeepers and business owners to cooperate and communicate with the accountant/ accounting firm completing the CO17 and T2, in order to have accurate tax returns.
A notice to reader, or financial statement, is compiled of a cover page, table of contents, a notice to reader page signed and certified, an income statement reflecting the company’s revenue. Any COG’s (cost of goods), operating expenses, tax provisions, etc., a balance sheet. Reflecting the companies year-end assets, liabilities and equity amounts. If a company’s assets were depreciated, an additional page would be prepared and included to the notice to reader showing the initial value of those assets, the depreciation amount, as well as the new book value of those assets
The notice to the reader is extremely important for businesses to have and keep as they are generally requested by the banks if ever the company needs to request for a loan, line of credit or any other type of funding. They are also required to have these documents if ever the business is sold. Potential buyers will most likely request the previous two years of the notice to the reader of the company in order to determine the profitability and standpoint of the business for sale.