Corporate Bookkeeping in Canada: What Changes Once You Incorporate

Most new corporations keep running their books the way the owner did as a sole proprietor: one bank account, a spreadsheet or basic software, and a catch-up session before tax time. That habit is where the trouble starts. Corporate bookkeeping follows a different set of rules, because the corporation is now a separate taxpayer from the person who owns it.

Here is what changes once you incorporate, and what your books need to show by the time the T2 is due.

When you incorporate, the business stops being an extension of you. It has its own business number, its own tax return (the T2), and its own bank account. Money that belongs to the corporation is not yours until it is paid to you, as salary, a dividend or a repayment of money you lent it.

For bookkeeping, that has three practical consequences:

• Every transaction needs a clear owner. Was this the corporation’s expense, or yours? The books have to answer that for every line.
• Personal spending on the business card has to be recorded somewhere. It does not just disappear as a “business expense”.
• The year-end is the corporation’s year-end, which may not be December 31. Our guide to choosing a fiscal year in Canada explains how that choice affects your deadlines.

The first rule of corporate bookkeeping is a separate business bank account and a separate credit card, used only for the corporation. It sounds basic, but mixed accounts are the most common reason a year-end turns into a rebuild.

When personal and corporate transactions sit in the same account, someone has to go through each one and decide where it belongs. That takes time, and every guess is a judgment the CRA can question later. A separate account turns that job into a straightforward reconciliation.

Owners of small corporations move money in and out of the business all the time. You might pay a supplier from your personal card, or take cash out of the corporate account before you have decided whether it is salary or a dividend. In the books, these movements go through the shareholder loan account.

It works like a running balance between you and the corporation:

• The corporation owes you when you put money in or pay corporate expenses personally.
• You owe the corporation when you take money out that has not been declared as salary or a dividend.

The second case is the one to watch. Under the Income Tax Act, when a shareholder owes the corporation money, that loan can be added to the shareholder’s personal income unless it is repaid within one year after the end of the corporation’s tax year in which it was made. The CRA also looks closely at a pattern of repaying a loan just before the deadline and borrowing it again straight after.

The fix is a bookkeeping habit: record every withdrawal as it happens, review the shareholder loan balance before year-end, and decide with your accountant how any balance owing will be cleared.

A sole proprietor simply draws money from the business. A corporation pays its owner in one of two main ways, and each one is recorded differently.

Salary means running payroll, with source deductions remitted to the CRA on schedule and a T4 issued at year-end. Dividends mean a resolution declaring the dividend, an entry in the books and a T5 slip. Many owners use a mix of the two. The right balance depends on your income needs, retirement plans and the corporation’s profit, which is a planning question as much as a bookkeeping one.

If salary is part of the plan, our payroll services handle the remittances and T4s, so they stay matched to the books.

A corporation picks up obligations that need tracking through the year:

• GST/HST collected and paid, recorded as it happens so the return is a summary and not an estimate. In BC, Saskatchewan and Manitoba, provincial sales tax is tracked separately.
• Corporate tax instalments, if the corporation’s tax bill is large enough to require them.
• Payroll remittances, if you or any staff are paid a salary.
• Capital assets such as vehicles, computers and equipment, recorded as assets and depreciated through capital cost allowance, instead of being expensed in full when bought.

Each of these has its own account in a well set up chart of accounts. That structure is what lets the books produce accurate numbers without a scramble.

The T2 is due six months after the corporation’s year-end. It is built from your books, and it needs more than a profit figure:

• A balance sheet and an income statement, reported to the CRA using GIFI codes, which map your accounts to the CRA’s standard categories
• Retained earnings, carried forward accurately from the year before
• Shareholder loan and dividend details
• Capital asset additions and disposals for the capital cost allowance schedules

When the books are reconciled every month, preparing the T2 becomes a review. When they are not, the accountant has to rebuild the year first, and you pay for that time. Our post on the T2 corporate tax return walks through what the return itself contains.

The CRA requires businesses to keep records for six years from the end of the last tax year they relate to. For a corporation, that means six years from the end of the fiscal period. Some records, such as the share registry and records of long-term property, have to be kept indefinitely, and a dissolved corporation must keep its records for two years after the date of dissolution.

Cloud bookkeeping in QuickBooks Online or Xero makes this easier, since the records, bank feeds and attachments stay in one place and remain available if the CRA asks.

The easiest time to set up corporate books properly is right after you incorporate, before a year of mixed transactions builds up. If you are still weighing the move, our look at whether it makes sense to incorporate in Canada covers the costs on both sides.

Your Modern Accountant keeps the books for incorporated owner-managers across Canada, in QuickBooks Online or Xero, with monthly reconciliations, a tracked shareholder loan account and a clean file ready for the T2. You can see how the service works, including pricing and onboarding, through our bookkeeping services.