The file is an Alberta CCPC. Incorporation Costs are from December 2014. They are on the balance sheet and are on GIFI 125 as Class 14.1. As I understand it, 75% of the incorporation cost at that time was eligible to be claimed (and it was).
Now, the remaining 25% is on the balance sheet and GIFI 125. I want to close that out.
I plan to close the balance out on the Balance Sheet to Incorporation Costs Expense. Then on the T2, close GIFI items 2018 & 2019 and then claim the expense GIFI item 8570 (Amortization of intangible assets expense). Then add it back on Schedule 1, Line 106.
If there is a more sensible procedure, please comment.
Can you explain what you mean by “close GIFI items”?
“Closing” is a term that refers to the year-end process, where all income statement (profit and loss) accounts get adjusted to zero by an effective journal entry, with a net adjustment to retained earnings. It doesn’t make sense to use the term “close” when talking about balance sheet items.
Further, it doesn’t make sense when you are talking about something on the T2 - all the “closing” is done outside TaxCycle (usually via journal entries in your year-end software or in the client’s bookkeeping software).
Also, what is “GIFI 125”? The lowest GIFI number is 1000 (that I know of). See Appendix A in this article:
If you are asking about the legality of writing off incorporation costs (per the income tax act), see the following:
I would only add that if the undepreciated balance is small, such that the tax liability is small, CRA might let it go without questioning. But, it is also possible that they could deny the “write off” without adding back the Class 14.1 UCC balance.
I’m assuming all you want to do is get the incorporation cost off the balance sheet.
And also, since you have a 14.1 balance, that the correct amounts were originally entered on S10 and subsequently converted to class 14.1 in 2017. So it looks like all is proper for tax purposes and whatever balance that is left in 14.1 will continue to be claimed from year to year.
So to clean up your balance sheet;
CR Incorporation costs to zero it out.
DR Accumulated amort. of incorporation costs to zero it out.
DR Amortization of incorporation costs for the difference.
On the T2;
Sch 100
CR line 2018
DR line 2019
Sch 125
DR line 8570
Whatever you enter on line 8570 will be added back on Sch 1 line 106
I had a related question.
I have had incorporation costs on my balance sheet as a fixed asset since I started my business.
I am assuming that this amount should not remain in perpetuity. What I found online so far is that it would be removed after 180 months.
Should I remove incorporation costs? And if so, is the correct timeframe 180 months?
I don’t think “180 months” is relevant. Class 14.1 is depreciated at 7% if you had previously reported it as intangible assets prior to 2017. If it arose since 2017, then you get only 5%.
I looked back to the beginning.
Although the incorporation was stated as a fixed asset in the balance sheet, I did not see that the incorporation value was set up in schedule 8 as CCA class. Rather I see they completed a Schedule 10 - Cumulative Eligible Capital Deduction form for the incorporation cost. I think that makes sense given 14.1 was introduced after that.
What is confusing me is that I don’t see any of the values calculated in the CEC forms - for example, the current year deduction or the closing balance - reflected in the balance sheets or in the income statements. The balance sheet shows the original amount for the incorporation year after year, no matter what is in the CEC forms. Should the values in the CEC have impacted the values in the balance sheet or income statement?
Or, am I looking for trouble where there is none?
Perhaps I am.
However, specifically, should the incorporation value listed in the assets section of the balance sheet shows the same value year after year - no depreciation/amortization?
From what you have said I would guess that the cost were entered on S10 well before 2017 and the appropriate claims for tax purposes were made year to year. On the conversion to 14.1 in 2017, if I remember correctly, if the remaining balance to claim was less that $500 you just write off the balance and therefore you wouldn’t see 14.1 going forward. So I think it is probably safe to say the the TAX claim for the incorp cost is correct and fully claimed.
So if you want to just clean up the balance sheet follow my instuctions above.
Thanks.
I tried to apply the fix above and it didn’t work out as expected.
If I CR Incorporation Costs from original value to 0 and then
DR Accumulated amort. of incorporation costs from zero to original value, then incorporation costs disappears from the balance sheet (good), but Accumulated amort of incorporation costs appears in the balance sheet.
The only way I found to get rid of both from the balance sheet was to add another G/L that moves Accumulated amort of incorporation costs to an expense account for Depreciation costs incorporation.
And then I am whacking my P & L by a significant amount for the incorporation costs that were nullified in 2017. So seems like I am misrepresenting expenses in 2024.
What am I missing?
It’s no different than when you record the sale of a capital asset. Typically you need:
CR asset account
DR accum.depreciation
DR proceeds (i.e. cash received/deposited into the bank - in your case, zero)
CR or DR gain or loss on disposal
As noted by others - this has nothing to do with the TAX treatment of the asset, other than the adjustments on S1 which must follow the rules for Class 14.1 additions/disposals (i.e. remove all the above and replace it with the adjustments from S8).
Why would anyone show incorporation costs as an asset? It’s not an asset. It has no value. You can’t sell it. You can’t generate income from it. I haven’t seen these expenses capitalized since the mid-1970’s. Whenever I have a client who incorporates, I write the cost off as professional fees, or legal fees. Add it back on the T2, Sch.1, then add it to the CEC schedule, if it predates class 14.1. If not, only the excess over $3,000 is added back on Sch.1, the rest set up as class 14.1. Although how can incorporation costs get to $3,000, anyway?
I agree. But, for some reason, @6404Lou has a client who did that. Now (I assume) that client wants it written off and @6404Lou doesn’t know how to do it.
