Schedule 1 (net income reconciliation)
Schedule 1 is the T2 schedule that reconciles the net income a corporation reports on its financial statements with its net income for income tax purposes. It is where a buyer can see why accounting profit and net income for tax purposes differ.
A seller’s statements and tax return can show different profit for the same year. Schedule 1 is the CRA’s bridge between them. A buyer meets it in the return’s schedules. The mismatch answer, what if the financials do not match the tax returns, starts here.
How the reconciliation runs
The CRA’s form page says the purpose of Schedule 1 is to provide a reconciliation between the corporation’s net income (loss) as reported on the financial statements and its net income (loss) for tax purposes. The T2 guide says to use it to reconcile the two figures. It starts from the net income on the statements and adds and subtracts adjustments. The guide notes that certain listed lines set out the most common additions and subtractions, with others on later pages of the schedule. See also tax returns vs financial statements.
Questions for the seller’s accountant
- Which adjustments appear on the schedule in each year, and why?
- Do any adjustments look like one-time items that affect how earnings are read?
- Does the net income on the schedule equal the statements’ net income, and if not, what explains the difference?
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentT2SCH1 Net Income (Loss) for Income Tax Purposes
- 02Canada Revenue AgencyGovernmentT2 Corporation – Income Tax Guide – Chapter 3: Page 3 of the T2 return
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