As we’ve discussed in other articles, you need to do corporate maintenance and government filings every year to keep your corporation in good standing in Canada (“Annual Corporate Maintenance”).
The annual corporate maintenance requirement is different from your corporation’s obligation to file income tax returns every year (“Annual Income Tax Return”).
However, when you carry out annual maintenance on the tobuso.ca platform, you will be asked for the date of your most recent annual financial statements. Why is that? If Annual Corporate Maintenance has nothing to do with tax, then why do we ask for information about your Annual Financial Statements?
The short answer is this:
One of the main purposes of Annual Corporate Maintenance is to document approval of the Annual Financial Statements by the corporation’s directors and receipt of the approved Annual Financial Statements by the corporation’s members or shareholders. We use the date of the accountant’s report (or cover letter) that accompanies the Annual Financial Statements to be certain about exactly which financial statements are being approved.
There is a lot of information packed into that short answer! We will unpack it further in the rest of this article by explaining each of the underlined terms (above) in more detail.
If you are reading this and thinking, “But wait, my corporation doesn’t have annual financial statements!” or “I don’t have a report from my accountant!” check out the bottom of this article where we discuss this topic exactly (it’s not as uncommon as you might think, especially for newer and smaller corporations).
Financial Statements
What are Financial Statements?
Every corporation needs to keep track of the money it spends and brings in and its assets and liabilities. That sounds simple at first, but it gets more complicated than you might imagine when you start doing it. As a result, each corporation has many different “accounts” (picture multiple spreadsheets that track various types of things going in and out), and together, the accounts end up recording all sorts of other information systematically. “Financial Statements” are a condensed or summarized version of the raw data the corporation has been tracking in the accounts.
What do Financial Statements look like?
Financial Statements usually follow a standardized format. At a basic level, they contain a table called an income statement (or profit and loss statement) and a balance sheet. They might also contain cash flow statements, explanatory notes and other information.
Suppose you hear people using the terms GAAP (generally accepted accounting principles) or IFRS (international financial reporting standards). In that case, they are referring to standards for keeping track of finances and reporting on finances.
Annual Financial Statements
Financial Statements can be prepared at any interval: weekly, monthly, quarterly, annually, etc. The Financial Statements that we are interested in for Corporate Annual Maintenance are the Annual Financial Statements.
What is a fiscal year?
When we use the term “annual,” we refer to the fiscal year of the corporation, not necessarily the calendar year. Every corporation in Canada chooses its fiscal year (perhaps with a few exceptions). For example, the fiscal year can be May 1 to April 30, October 1 to September 30, January 1 to December 31, June 15 to June 14, etc.
Fiscal years are sometimes less than 365 days (such as March 12 to Sept. 30)—for example, when a corporation is starting, winding down, or changing its fiscal year-end date. This is sometimes referred to as a “stub year”.
How are fiscal years chosen?
Fiscal years are usually chosen based on factors such as seasonality in operations, accounting costs (fiscal year ends outside of busy times might lead to lower accountant fees), Government or granting agency budget cycles, etc.
Accountant’s Report
What is the role of accountants vs. bookkeepers in the preparation of Annual Financial Statements?
Accountants usually prepare Annual Financial Statements.
Bookkeepers are usually the ones in charge of doing the day-to-day tracking, data input, etc. Bookkeepers also typically take care of more regular filings, such as HST filings/remittances and workplace safety filings/remittances.
Accountants usually design the overall tracking system, analyze and compile the data periodically (weekly, monthly, annually), prepare tax returns, provide strategic advice, etc. When you hear about controllers and CFOs, they are usually accountants but in more of a management or executive role.
What information is needed to prepare Annual Financial Statements?
In order to prepare the Annual Financial Statements, accountants need the raw data that the corporation has been tracking over the fiscal year in its accounts (described above). Usually, it is the bookkeepers that have that raw data (or, if there is no bookkeeper, then someone within the corporation that takes care of bookkeeping, such as an owner or an Executive Director).
Accountants might also need other information about the corporation. In the case of a for-profit corporation, the accountant might ask about the type of business it engages in, the geographic regions where revenues come from, or expenses are incurred, and whether there have been any changes in ownership. The owners or managers of the corporation might be in a better position to provide this information than the bookkeepers.
What is the process and timeline for preparing Annual Financial Statements and the Accountant’s Report?
Accountants usually take one to three months from the end of a corporation’s fiscal year to get the raw data they need from the corporation and/or its bookkeepers.
Suppose your corporation has been slow or sloppy with bookkeeping throughout the year. In that case, it might take you longer than three months to get all the data to the accountant… and at that point, you will start to slow down the accountant in the work they have to do before the Annual Income Tax Return and Annual Corporate Maintenance deadlines.
Once the accountant receives the raw data, they usually take one to three months to prepare the Annual Financial Statements.
It is typical for accountants to first provide draft Financial Statements to a corporation’s managers to review. The managers then have an opportunity to give feedback, provide clarification, suggest corrections, etc. The accountants consider that feedback and may revise the Annual Financial Statements before making them final.
Once the Annual Financial Statements are finalized, the accountants:
- File the corporation’s annual income tax returns (T2),
- Provide a final copy of the financial statements, including a 1+ page report at the front of the financial statements.
What does the accountant’s report look like?
The accountant’s report is usually the very first or few pages at the front of the financial statements. It is sometimes called a “Cover Letter”. It is commonly titled “notice to reader”, “audit report”, “engagement report”, or “review report”, or something like that.
The accountant’s report will be dated and signed by the accountant (or accounting firm).
The report will also specify the type of Annual Financial Statements that they are (see below). It also provides a few other details, like the level of investigation the accountant undertook (and how much the accountant trusted the numbers provided by the corporation without verifying or questioning them) and specifies what they are and aren’t responsible for.
Three types: Annual Financial Statements and Accountant’s Reports
Annual Financial Statements have three types: audit, accountant review, and notice-to-reader.
“Notice-to-reader” is most common for smaller businesses, so that you might see this term more often.
The category of accountant’s report you require will depend on the type of business that you are engaged in. Most private for-profit corporations stick with the lowest level because it’s the cheapest and fastest. However, if you are looking to sell your business to seek financing or go public, then audited financial statements might be required.
For nonprofits, audited financial statements are more common because they are mandated once a non-profit reaches a certain threshold of revenue from certain sources.
What information do I need from my Annual Financial Statements for my Annual Corporate Maintenance?
Your Annual Financial Statements are used to fulfill two separate but important requirements each year:
- Tax: file income tax returns no later than six months after your corporation’s fiscal year ends.
- Corporate: file an annual corporate report every year with the corporate registry that you are incorporated with and complete Annual Corporate Maintenance resolutions or have in-person annual meetings of directors and shareholders/members.
For Annual Corporate Maintenance, we need the date of the accountant’s report that accompanies the Annual Financial Statements so that we can specify what financial statements are being approved by the directors (see below).
Approval of financial statements by directors
Corporate law says that every year, the directors of a corporation must review and approve the Annual Financial Statements (once they are in a satisfactory state).
Those approved Annual Financial Statements go to the shareholders or members for review. The shareholders/members should then have an opportunity to ask questions about them (which is a process that happens at most AGMs). Typically, shareholders/members only review and question the financial statements but do not have an approval role.
One part of the Annual Corporate Maintenance process is properly documenting and confirming that the directors approved the financial statements, the shareholders and members received them, and shareholders/members had a chance to review/question them. The date of the accountant’s report accompanying the Annual Financial Statements helps us specify exactly what financial statements are being approved.
What if I don’t have financial statements or an accountant’s report?
This is not an uncommon situation for smaller corporations. Sometimes, an accountant is engaged, but the level of engagement is very low, and no report is prepared. Sometimes, there isn’t even an accountant engaged, and someone within the corporation is taking care of bookkeeping, accounting, and filing taxes on their own.
If you find yourself in this situation, please contact the team at tobuso.ca and you will be able to get help with your Annual Corporate Maintenance all the same.
In such cases, it becomes difficult to comply with the corporate law requirement to have financial statements prepared and approved by directors and reviewed by shareholders/members. However, some alternatives keep with the spirit of the law, which is the best approach, where it is not financially practical for a corporation to have proper financial statements prepared and accompanied by an accountant’s report.
An alternative approach can work as a stopgap for newer, smaller, inactive corporations. However, all corporations should strive to reach a point where financial statements are prepared annually, and Annual Corporate Maintenance is properly carried out annually. That is especially true if a corporation’s ownership or membership differs from management.
Taking care of your Annual Corporate Maintenance
We hope that the information in this article has been helpful to you.
When it comes to carrying out Annual Corporate Maintenance and filings, we have made it simple for you on the tobuso.ca platform. You can easily sign up for an account at tobuso.ca, add your corporation to the platform, and, with a few button clicks, carry out your Annual Corporate Maintenance at a reasonable cost.
If you ever need help or have any questions, contact the team at tobuso.ca for assistance.
