Financial Statements and Corporate Tax Returns
A Canadian corporation approaching its year end will be needing two key services, the preparation and finalization of their financial statements and the preparation of a corporate tax return. These are two distinct services as a corporation will need their financial statements prepared before their tax return can be started.
Preparation of the financial statements involves compiling the income statement and balance sheet of the corporation, which document that financial activity and year-end financial position respectively. This process is time consuming depending on the size of the corporation and the amount of supporting documentation (i.e. receipts) that need to be reviewed.
These two statements are the starting point from which a Canadian corporate tax return is based and they need to be prepared in accordance with Canadian accounting standards, which are different for public corporations and private corporations.
Tax Return Process – What You Should Know
While the tax returns are based on the financial statements, the extensive adjustments and additional information are required to prepare the tax return and determine the taxable income of the corporation, which is different than the net income from the income statement. This is due to the fact that for tax purposes many accounting concepts, for example meals and entertainment or leases, are treated differently than they are for accounting purposes.
For corporations in Canada tax returns are required to be filed with the CRA within 6 months of the corporation’s year end. If a corporation has not filed their tax return within 6 months, a penalty will be assessed based on the tax owed, and for some corporations, even if no tax is owed, there will still be penalties assessed.
There is, however, a big catch in that any actual taxes due by the corporation must be paid within 3 months of the corporations year end. This means that most corporations have their taxes completed within 3 months of their year end, or at least have the tax return process substantially completed and have prepared a tax estimate. As penalties and interest will be applied on late tax payments, a corporation that has not completed their return by the deadline will want to make a payment sufficient to ensure its likely tax obligation is covered.
After a Return is Submitted
Once a tax return is filed with the CRA, it can take several weeks for the return to be processed and a Notice of Assessment to be received. If a refund is due, the CRA will typically pay a refund by cheque or to the accounting linked to the corporation in their records at the same time the Notice of Assessment is issued. The CRA may also request further support related to the information in the tax return, which typically must be provided within 30 days or the CRA will issue a Notice of Reassessment. When a Notice of Reassessment is issued, the CRA will revise the taxes owed by the corporation, typically increasing them, as they disagree with something related to the tax return they received.
Financial Statement Audit and Assertions Consulting
A financial statement audit is the process by which assurance is provided over the financial statements of a corporation. Effectively, this is a certified accountant stating that the financial statements are reasonable based on the testing and accounting procedures they performed to test the correctness of the figures in the financial statements.
A fundamental concept in a financial statement audit is that of independence – the accountant performing the audit is completely independent of the corporation and the financial information they are providing assurance for. This means that an auditor cannot have any financial ties to the corporation and they cannot have done any of the work preparing the financial statements.
The cost of a financial statement audit is often significant, both due to the work involved and due to the fact that the accountant performing the audit is putting their name behind the opinion in the audit report. As a result of this, most companies will only undergo a financial statement audit if it is required of them, either by regulators or by their lenders.
One way a company can reduce the cost of an audit is through assertion consulting. Whereby they engage individuals to ensure the assertions tested during an audit (i.e. the completeness of accounts or the existence of assets) are all addressed through their existing processes. This can reduce the amount of work, and the cost, required when undergoing an audit.
The outcome of a financial statement audit is the issuance of an audit opinion by the accountant performing the audit. The outcomes are stipulated by Canadian auditing standards and the result will be, in order of severity from positive to negative, a clean report, a qualified report, an adverse report, or a denial of opinion.
Companies will want to receive a clean report, with qualified report noting a specific issue in the financials and an adverse report noting widespread issues with the financials. A denial of opinion will only occur when the accountant feels that due to a lack of participation from the corporation and widespread issues they cannot provide any opinion on the reasonability of the financial statements.