… but in this case the issue would be if that “Subsidy Income” is reported on the Income Statement (and S125) how would you report it on line 295 of the Schedule 1 as CRA is asking? You need to somehow get that income off your income statement (S125) in order to report it on line 295 of S1.
… or in the case that SmallBizGuy put forward, where the CRA requires the 10,000 to be brought into income in the current year (line 295 of Schedule 1) but for accounting purposes you don’t recognize the income on your income statement until a future year (when repaid) your income statement would be 10,000 higher than your taxable income (because the 10,000 was declared as income in a prior year for tax purposes). How would you take the deduction or reconcile your financial statements to your RSI schedules. It can be done… but it is a bit messy, and could raise questions that need to be explained.
I had some discussions with Hugh Neilson who is part of the editorial board at Video Tax News.
His reply:
We would definitely need to reflect an “other deduction” to remove whatever has been reported in the financial statements. With the deemed receipt of CEWS and CERS on the date the period ends, there may be a timing difference anyway. I’m pretty sure GAAP would not allow reporting the forgivable portion of a CEBA loan as income when the loan is advanced (although most organizations big enough to be required to follow GAAP due to an assurance need likely would have a materiality level above $10k or $20k).
I can see why CRA would like to see the items separately reported and categorized – it will make it clear that the taxpayer has addressed the tax ramifications of these forms of government assistance. It seems likely to be one of the many areas where tax preparers and taxpayers don’t make separate disclosure of tax items which are already reflected in accounting income (such as the allowance for doubtful accounts being a reserve for tax purposes, which should technically be reflected by Sch 13, and an addback of accounting amounts with a deduction for tax amounts – I can’t say I have never seen it, but when the accounting and tax amounts are identical, it’s pretty rare to adjust Sch 1 to get a net change of nil).
However, it seems odd that they would not recognize that, if the amount has been reflected as financial statement income, it has to go on the GIFI somewhere, or the GIFI income, equity and balance sheet will be thrown off. I’m going to raise this with CPA Canada – they are in regular contact with CRA on COVID-related matters, so maybe they can get some clarification, and get the word out through their COVID web page.
Just for a FYI ASPE 3800.24 indicates that forgivable loans should be recognized when granted not when forgiven.
FORGIVABLE LOANS
.24 A forgivable loan is a type of government assistance drawn up in the form of a loan that is forgiven on condition that the “borrower” continues to meet certain requirements specified at the time it was granted. The Board has concluded that, in view of the intention of the government to forgive the loan, there is, in substance, no difference between a forgivable loan and a grant to which there is attached a contingent liability for repayment. Accordingly, accounting for forgivable loans is guided by this Section. The loan shall be recognized as a grant when the enterprise becomes entitled to receive it and not at the time such loans are forgiven.
.25 When an enterprise becomes entitled to receive a forgivable loan, it shall be accounted for in the same manner as a grant. The appropriate accounting treatment shall be based on this Section.
While this may irk some people, those are the rules. the BCCPA web site has similar instructions. Really, accounting for the forgivable portion of the CERB is the same as accounting for investment tax credits. An ITC earned on an eligible asset purchase is credited to the asset cost and debited to either a current or non-current ITC asset account. If there is insufficient federal tax to absorb it, the balance gets carried forward. For T2 purposes, the credit shows up on the S8 of the following year, and line 652 in the tax calculations for the current year. It’s interesting that certain M&P equipment purchases will qualify for the 100% CCA write off with no half-year rule, plus earning an ITC at the same time.
I don’t think the issue is that it irks people… the issue is there is no clean way to account for some of these subsidies using the suggested line 295 route and the CRA hasn’t provided any guidance.
This is not the same as Investment Tax Credits, Interest on Taxes, Depreciation, 50% Meals, or Apprenticeship Tax Credits which are adjustments to income tax payable, and most of which can be accounted for through “Income Tax Expense” via line 9990 of the Schedule 125. The CRA even has a coping mechanism on the S1 (line 401)to account for the fact that only 50% of capital gains are taxable, or line 402 for Tax Free Capital Dividends Received.
The issue here is that in many cases (CEWS, CEBA etc) there has been money deposited to a corporate bank account. That money would have needed to be accounted for in the books of the corporation with a debit to bank or receivable account and some type of offsetting credit (revenue).
CRA’s requirement to include the subsidy on line 295 of schedule 1 poses a problem if the corporation has accounted for the bank deposit in its company books. It would be a great idea for them to provide some type of guidance of how the company is to record the credit in their books if it’s not to be classed as income on the schedule 125.
How does CPA of BC recommend you to handle this? Debit Bank and Credit shareholders loan?
Would it be possible for you to link to the instructions? I went to their site and poked around a bit but I must be using incorrect search terms.
I went to BCCPA and typed ceba in their search window. I poked around a bit on CPA Canada, but found nothing. In Knotia, the ASPE section 3800.24-.25 deals with forgivable loans and seems pretty clear. If we follow that guidance and also enter the 25% on line 295, a corresponding entry has to then be made on line 395. So far, I’m ignoring both lines. Could be CRA is trying to use us as an auditor again, much the way we are being taken advantage of by completing boxes 57-60 on T4’s.
@Don_Murray
Interesting! I did not expect any of the published accounting standards to align with ITA 12(1)(x). However, as Hugh points out in @Rein 's post - most small business clients do not have to follow any version of GAAP, let alone ASPE. But, all businesses are required to adhere to the ITA with respect to tax filing. (Remains to be seen how aggressive CRA will be in enforcing this…)
I experience this problem too. After reviewing GIFI guide, I am going do this way to match CRA reporting requirement regarding Covid 19 programs (CEWS, TWS, AND CEBA). I found this would fix the double reporting problem.
Dr. bank, Cr. Retained Earning-Unusual revenue items (GIFI code 3744), this would not affect net income before tax therefore avoiding double income counting. Then we can add those unusual items on S1 line 295 to increase taxable income. I found this is a good way. Making sense?
Also, I may try normal way. I record those items to other income in F.S, reporting on S1 line 295 too, but also, I put the same amount on S1 line 314-- other income from F.S. to deduct.
Which way is better? Any idea?
It seems even the CRA is in contradiction with itself now…
They are suggesting you identify or describe the individual Covid subsidies you received on line 605 of Schedule 1 but put the amount in as zero on line 295. Presumably because it has already been included on the financial statements and line A of the Schedule 1?
I also note however, the instructions in the link in @Don_Murray’s initial post have not changed
"If COVID-19 related assistance is received, report the amount on line 295 of T2SCH1, Net Income (Loss) for Income Tax Purposes. Do not include it under item 8242. "
PREVIOUSLY page 35 of T4012:
“Use Schedule 1 to report income from the COVID-19 programs: write the name of the COVID-19 measure (for example, the Canada Emergency Wage Subsidy or the Canada Emergency Business Account) on line 605 and enter the amount on line 295.”
NEW CURRENT page 35 of T4012:
“Use Schedule 1 to report income from the COVID-19 programs. Clearly identify each of the COVID-19 subsidies received on line 605 (for example, “CEWS $15,500”) with a corresponding “0” entry on line 295.”
.
So now it works. For CEWS.
