A corporation had a loss in 2019. The corp had the option to carry back the loss or carry the loss forward.
The corporation decided to carry the loss back to a year with profit.
Schedule 4 “Corporation Loss Continuity and Application” was completed.
The CRA received the application and successfully processed the loss carry back to a previous tax year resulting in a refund to the corporation.
The journal entry I have is:
Tax expense XXX
Does anyone have any thoughts/comments?
That is what I do, but never quite sure if it is correct.
This would be reversed journal entry for recording income tax expense.
When you record the tax refund while filing corporate tax return:
Dr Income tax payable xxx
Cr Income tax expense xxx
When the tax refund is received:
Dr Cash xxx
Cr Income tax payable xxx
Simple answer is yes - that works. (I do the same)
It could be argued that the refundable amount pertained to the prior year, and thus the prior year should be adjusted to reflect the reduction of income tax expense in that year, with the “pending” refund shown as a receivable on that year’s balance sheet. But, the amount of work required to do those changes is onerous, and clients generally don’t want to pay $1,000 to get a $100 refund (for example).
Further, there is no change to taxable income in either year, regardless of which year you post it in (a tax refund is not taxable income).
The only difference is how it shows up on the financial statements (current year vs prior year), and that doesn’t matter to most clients.
You could create a separate expense account called something like “Prior year income tax reduction due to tax loss carry back” to make it clearer on the financial statements (I can’t remember which accounting principle this stems from…relevance? full disclosure?) but again, is it worth the extra time and effort on your part?
Thank you all for your responses!
I truly appreciate them and wish you a great day.
To provide more details corp received $4,000.00 refund in 2020 from loss carryback completed on 2019 tax return.
For tax year 2020, there is a small profit resulting in a $2,000.00 tax amount owing. That will go into S140 GIFI 9990.
Where does the refund from the loss carryback get entered into the 2020 T2?
" Where does the refund from the loss carryback get entered into the 2020 T2?"
Your S100 does not balance?
This is an issue for the Trial Balance and the Financial Statements.
After you get the Trial Balance to balance (a bookkeeping function), then a balanced Financial Statements should be properly prepared (an accounting function), including with a balanced Balance Sheet.
Only after that is done, then you copy those amounts into the tax software (a data entry function), which then will obviously balance.
[If there is an error, the first step in solving it is to identify at which step it occurred, then examine within that step for what went wrong.]
As Joe indicates, the refund should be recorded in the bookkeeping records, not just on the T2. Typically,
DR Bank account
CR Corporate tax expense
Then, assuming you use the correct GIFI codes prior to importing (or manually entering) the trial balance into TaxCycle, it will show up in the right place on the T2 S125.
Thank you for your replies!
What about dumping it into Retained Earnings as a Prior Year Adjustment?
My practice is to project it and record it as a recovery on the financials of the year of loss.
Suppose, in the above scenario, you had neither included the amount in 2019 T2 nor in 2019 accounting but did apply for the carryback of 2019 losses. CRA approves it and sends you a check for a refund in 2020. Should you refile the T2 for 2019 and adjust accounting for the year 2019 or you can adjust both the T2 and accounting in 2020 (as a tax refund of 2019). @NiceGuy @Nezzer
If you’re preparing IFRS statements or something, maybe you would have to restate 2019 and amend the 2019 T2. Otherwise, it’s not going to matter - CRA won’t care if you amend a T2 just to show a non-deductible tax refund (it doesn’t affect taxable income). If CRA paid interest on the refund, the interest income is taxable in 2020, but other than that, just include it as a reduction to the 2020 tax expense.