How to Prepare Tax Files for an Economical Deliverable?
The purpose of this article is to provide a schedule of information for preparation of a standard Corporate Income Tax Return. However, the same information can be used to commence the preparation of a year-end tax provision. Within this article, we provide a general description of the main components of the schedule, to facilitate the creation of a well documented tax file to produce an economical review/deliverable.
The trial balance is the heart and soul of any tax deliverable. It is the starting point of any review, and most queries that are produced by a tax preparer will be sourced from the trial balance. Any work that can be performed to summarize a trial balance, effectively by account, will significantly streamline the efforts to complete a tax return and/or provision. Keeping in mind that a trial balance is typically not a general ledger listing, a trial balance that is condensed to hundreds, or less than 100 transaction lines will be more efficient to work with than a trial balance that has thousands of data lines.
Typically, this request refers to a listing of associated and related entities (Corporations, partnerships, LLC’s, foreign parents, foreign affiliates). If there are more than one legal entity and shareholder in your company, the tax preparer needs to know. Providing any changes, or even better proposed changes, to your tax preparer before they arise will help alleviate a significant time investment by your preparer at year-end. More importantly, it should create an opportunity for your preparer to provide tax planning advice to factor into your business decision. An organization chart is a road map to all tax compliance, it may result in international tax filing, open doors to transfer pricing planning, and avoid audit exposure.
For example, your corporation may have a minority investment in a US company (8%), with another unrelated Canadian corporation owing 30%, and the residual ownership coming from a US parent. During the most recent fiscal period, the unrelated Canadian corporation acquired an addition 15%. Even though no single Canadian corporation owns a controlling interest, the fact that two Canadian corporation now own over 50% of a US entity means that, under Canadian tax rules, your corporation now has a Controlled Foreign Affiliate, which opens a whole new world of tax implications for your company. Any changes to your organizational structure, should be communicated to your tax advisor as soon as possible, and preferably before it happens. Providing significant structural change(s) a week after the year-end closed will not lead to an economical deliverable.
Signatory and Corporate Address:
It is our recommendation, that where possible, you employ someone that has the authorization to login into the My Business Account, or Represent a Client function, with the Canada Revenue Agency, to update authorized signatories and maintain addresses. Keeping this information up to date does not take a lot of effort, however, providing out of date information to a tax preparer may lead to amended returns, delays in having a return assessed, and time spent on the phone that may not be necessary.
Where general reserves are created for Allowance for Doubtful Accounts, or Inventory waste as an example, these reserves are not deductible for tax purposes. Where, you have measured a specific reserve, based on a specific customer’s insolvency, or assessment of inventory damage, these reserves are deductible. Therefore, an organized summary of general and specific reserves that tie directly to the trial balance will facilitate adjusting taxable income in a sensible manner.
Fixed Assets: Fixed Assets usually represent the most significant addition and deduction to taxable income. Depreciation included within the trial balance is added back to Net Income, while the wonderful world of tax creates a separate calculation to arrive at Capital Cost Allowance: the tax version of depreciation. There are many factors to consider here:
You do not have to know all of the nuances of capital cost allowance, as that is what you are paying a tax preparer for; however, the more information that you can provide for assets acquired and disposed of, in a well organized file – will go a long way in assisting the preparer produce an accurate capital cost allowance – with as few follow-up queries as possible. Please review the ‘schedule of information’, for the minimum information required.
It is easy to overlook certain amounts owing to, and from, non-residents. Especially, where Canada is the immaterial subsidiary of a large multinational that consolidates, for accounting purposes, in a foreign jurisdiction and intercompany balances are offset. However, the Canada Revenue Agency will make audit adjustments for unpaid balances, certain low or zero-interest debt, and for upstream loan balances (which may include debt held by a foreign sister company). Therefore, tracking the ebb and flow of non-resident debt will help avoid unwanted surprises such as deemed dividends at year-end, or significant adjustments to taxable income. By staying proactive, you can also avoid significant cost associated with transfer pricing audits, and your advisor/preparer may have some tax planning opportunities for your specific situation.
The T106 is an information return for transactions with non-resident entities. The return covers (not an exhaustive list): trade transactions, interest, rent, royalties, technical fees, management fees, foreign based insurance, dividends, trade balances, derivatives and reimbursements of various expenses. Where the balance of these transactions, in aggregate, is less than $1,000,000 CAD, you do not have to complete a T106 return. However, where you cross the threshold, even if you have 10 non-resident entities with $100,000 each in eligible transactions, you must complete a T106 slip for each non-resident entity. A summarized file, per entity, goes a long way in reducing queries and turning the Tax Return around expeditiously.
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