Tax returns vs financial statements
A tax return reports income for tax purposes, while financial statements report the business’s results as its accountant presents them. The two can differ, and the CRA’s Schedule 1 exists to reconcile a corporation’s statement income with its income for tax.
The CRA says all resident corporations must file a T2 corporation income tax return every tax year, even if no tax is payable; the exceptions it names are tax-exempt Crown corporations, Hutterite colonies and registered charities. A buyer in diligence can ask for both the returns and the financial statements, and the two do not have to show the same income.
How the CRA links them
The CRA says Schedule 1 provides a reconciliation between the corporation’s net income as reported on the financial statements and its net income for tax purposes. The CRA’s Schedule 141 guidance also says to include any notes to the financial statements and the auditor’s or accountant’s report, if they were prepared.
What to ask for
- Several years of both filed returns and financial statements
- The Schedule 1 reconciliation and an explanation of each large difference
- The accountant’s report and notes, where they exist
See the financial records checklist and accrual vs cash accounting.
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 AgencyGovernmentCorporation income tax return
- 03Canada Revenue AgencyGovernmentWhat is Schedule 141, General Index of Financial Information (GIFI) - Additional Information
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