Corporate tax question - does payment goes on the same years return?

[vim]

OK, I know my accountant probably will take care of this, but I am the guy who tries to understand accounting, so I have to ask you this.

I went to accountant for my corporate taxes and he entered into his program all my income, expenses, accounts receivable and accounts payable. At the end, because I had profit in my company he printed out my T2 and it shows that I have to pay x amount corporate tax. All clear up to this point.

As I do Quick Book filing myself, I have to enter that amount somehow in QB. I cannot add this to my previous year (2011) expense into accounts payable - because that would be like additional expense and because of that expense my profit would have been smaller so tax would have been smaller. Clearly, I believe I have to enter that amount into year 2012 as tax paid (?). Now that does not make sense to me as well, because if I had pay installments on corporate taxes in year 2011, then installment amounts would have been attributed to year 2011 and they would have been treated as expense for year 2011. I hope I make sense explaining myself.

So clearly I am missing something, but I cannot figure out what. Could anybody explain me?

Thank you very much in advance!

[Hansol]

Your original assumption is correct: the tax balance is applicable to the 2011 fiscal year, with the straight-forward entry into the 2011 books of:

Dr. Income tax expense
Cr. Tax payable.

What happens is that for tax purposes, the income tax expense per your book balance figure essentially gets added back to income on the tax return, and as such you are taxed on the "appropriate" revenue figure.

[vim]

Your original assumption is correct: the tax balance is applicable to the 2011 fiscal year, with the straight-forward entry into the 2011 books of:

Dr. Income tax expense
Cr. Tax payable.

What happens is that for tax purposes, the income tax expense per your book balance figure essentially gets added back to income on the tax return, and as such you are taxed on the "appropriate" revenue figure.

Thank you very much Hansol, that was helpful, but I still need to confirm few details:

Lets say my corporation had profit 10,000 and my tax payable is 1,700$:
As soon as I enter new income tax expense for year 2011, my "Net Income" for that year changes - instead of 10,000$ it becomes 8,300$. Is that expected or am I doing something wrong?

[Hansol]

Vim,

That is indeed expected. Often what you'll see presented on financial statements is a "Net income before taxes" figure, so you know what your business actually netted and the revenue figure you're being taxed on, and then a "Net income after tax" figure, so you can see the total net income for the year. Of course, the "effect" of adding the tax expense is a decrease your net income and retained earnings figures, but this is normal. So from your example, you are doing everything correctly.

[bzkzgz]

I have a very similiar question / confusion:

• On Schedule 125, I calculate Net Income Before Taxes (GIFI 9970) and then subtract Current Income Taxes (GIFI 9990) to obtain Net Income After Taxes (GIFI 9999)
• On Schedule 1, I'm instructed to use GIFI 9999 from Schedule 125 as the starting amount (i.e. Net Income After Taxes). I then need to add back "Provision for income taxes - current" (which I interpret as being the same value as GIFI 9990 from Schedule 125) along with other items (e.g. Non-deductible meals) to determine Net Income For Income Tax Purposes
• On line 300 of T2, I enter the Net Income For Income Tax Purposes (from Schedule 1) as the starting point for calulating my Income Taxes

The calculations above all "make sense" to me but its also very circular. In order to calculate my 2011 "Current Income Taxes" on the T2, I'm asked to use numbers from Schedule 1 and Schedule 125 that have first subtracted and then added "Current Income Taxes" from "Net Income Before Taxes". But how am I supposed to know what value to put in Schedule 1 and Schedule 125 unless I've already completed the T2? In the end I just let "Current Income Taxes" on Schedule 125 and Schedule 1 = "X" until I finish the T2 calculation of "Current Income Taxes". Then I replace "X" with the value calculated. I think I'm doing it correctly, but it seems silly to me so I'm wondering if I may be doing something wrong.

[peacestar]

Here is the order
1.GIFI
2. Schedule 1
3. T2

Current year tax on GIFI 9990 and schedule 1 is income tax provision based on accounting records and not line 770 of the T2 return.

[bzkzgz]

Thanks Peacestar. If I understand correctly, "tax provision" is a corporation's estimate of tax which may differ from the corporation's actual calculated tax (e.g. estimate of $10,000, but actual calculated tax is $11,000). Since the estimates cancel themselves out (subtract from net income on Schedule 125, re-add on Schedule 1) it doesn't seem to really make any difference what the estimate is (as the estimate won't affect T2 calculated tax).

However, this estimate does affect the retained earnings Balance Sheet calculation on Schedule 100, as for Net Income/Loss (GIFI 3680), I'm instructed to use the same value as the Schedule 1 "Net Income/loss After Taxes" (GIFI 9999) which is calculated using the GIFI 9990 estimate (e.g. if I estimate $10,000, but actual calculated tax is $11,000, my Balance Sheet retained earnings will be $1000 higher than they actually are).

My corporation is really simple (1-man IT contracting with "normal" expenses and eligible for Small Business Deduction ... no other complications besides Meal/Entertainment add-back). During the year I never really set aside or estimated a "tax provision". To make it simpler for my corporation (and myself!), can I just set the tax provision/estimate equal to calculated tax, and that way everything (especially my Balance Sheet/Retained Earnings amount) will line-up correctly?

[Hansol]

Wow, you are in up to your neck eh?

Okay first, ignore the GIFI stuff, because nobody really pays attention to that. It's a code developed so that people can bulk-import figures from accounting software (via macros and such), and generally is used for that purpose and not for a reference. It's simpler and cleaner just stick to the schedule references. So with that in mind, here is how it generally works:

Step one:
Import your BOOK BALANCE figures into the S100/S125. The numbers on these scehdules should exactly match your book figures. Yes, it's that straightforward.

Step two:
Do all your add backs per S1, any S4 losses, S8 CCA, etc. This is all TAX-RELATED, and has nothing to do with the S100/125 figures.

Step three:
As a result of the above, you'll get your taxable income figure, and be able to calculate your taxes payable figure.

Step four:
Accrue the taxes payable/Income tax expense figure in BOTH your own books as well as the tax return (S100/S125.) Dr. Income tax expense, Cr. Taxes payable. (This figure will of course be added back on the S1, but with the way the returns are set up, this add-back will exactly match the tax expense due to gov't amount that the T2 says you will owe. It's just a big circular calculation is all.)

Step four:
Write out a cheque to Receiver General/Minister of Finance for the amounts owed.

Step five:
Check your book balance retained earnings figure against the RE figure on the S100; if they match, you did it correctly.

The thing to remember is that when it comes to taxes, you have TWO sets of books: one that plays by your own rules, and one that plays by the government's rules. The whole process of filing a T2 is to get your own figures in compliance with the government rules.

[bzkzgz]

Thanks Hansol! I did a poor job explaining things, but I believe I am following pretty much the exact process you outlined (and in the end everything matches in my books and what I'm reporting on T2/T100/T125). It was just the (as you describe) "big circular calculation" that was puzzling me.

I know its your living, but because my corporation is so simple, I really felt I should be able to do my T2 taxes on my own. I only have about 10 numbers that I need to plug in. However the really difficult part (which I remember reading in one of your other posts) is figuring out exactly what values to use and where to place them.

I greatly appreciate your help.

[vim]

Wow, you are in up to your neck eh?

Okay first, ignore the GIFI stuff, because nobody really pays attention to that. It's a code developed so that people can bulk-import figures from accounting software (via macros and such), and generally is used for that purpose and not for a reference. It's simpler and cleaner just stick to the schedule references. So with that in mind, here is how it generally works:

Step one:
Import your BOOK BALANCE figures into the S100/S125. The numbers on these scehdules should exactly match your book figures. Yes, it's that straightforward.

Step two:
Do all your add backs per S1, any S4 losses, S8 CCA, etc. This is all TAX-RELATED, and has nothing to do with the S100/125 figures.

Step three:
As a result of the above, you'll get your taxable income figure, and be able to calculate your taxes payable figure.

Step four:
Accrue the taxes payable/Income tax expense figure in BOTH your own books as well as the tax return (S100/S125.) Dr. Income tax expense, Cr. Taxes payable. (This figure will of course be added back on the S1, but with the way the returns are set up, this add-back will exactly match the tax expense due to gov't amount that the T2 says you will owe. It's just a big circular calculation is all.)

Step four:
Write out a cheque to Receiver General/Minister of Finance for the amounts owed.

Step five:
Check your book balance retained earnings figure against the RE figure on the S100; if they match, you did it correctly.

The thing to remember is that when it comes to taxes, you have TWO sets of books: one that plays by your own rules, and one that plays by the government's rules. The whole process of filing a T2 is to get your own figures in compliance with the government rules.

Hansol,

I just bought Tax Incorporated software and followed your steps. At first I had problems because as soon as I added Income tax to my Schedule 125 (and related accounts payable amount to Schedule 100), my corporate taxes would decrease. My problem was - I was adding Income tax under 8762:BUsiness tax line. That was not correct place. I noticed that at the end of the form there is line:" 9990: Current Income Taxes". When I added my tax amount to this line, then return kept same income tax and my retained earnings decreased as I wanted.

Thank you very much again for your help in understanding this!

[vim]

I have a related question. When my accountant did my taxes, he calculated tax payable, but he did not added that income tax to schedules 100 and 125, so my reported retained earnings are higher.

In such case should this T2 be fixed and re-filled, or will this amount be automatically added as some sort of credit to my next years return?


Thanks!