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Incorporation Costs Under $3000.00

Hi,

I am seeking a guidance how to enter incorporation costs under $3000 of a newly formed company in tax cycle. I read in following link that one can expense it as current expense, if under $3000 and use Sch 1 at line 418 of T2. as well as T2 guide.

But how this will flow from my Financials to GIFI and then to line 418 of Sch 1. If I enter directly at line 418, my financials and GIFI don’t match for compilation purposes. Please guide, how to enter it in tax cycle? Currently, I have put it my financials as incorporation expenses (even though there is no GIFI for this expense line item). Thanks in advance for any valuable advice.

Harry

Incorporation costs are considered an Asset for accounting purposes, so they would generally appear on your Balance Sheet (lets say GIFI code 2018 if you were transferring to the Schedule 100).

Line 418 on the Schedule 1 is a manual entry that allows you to deduct for tax purposes an amount of up to $3,000 for incorporation costs under the assumption you have recorded the incorporation fees on your balance sheet (Schedule 100). If the incorporation costs are over $3,000 then you claim $3,000 on line 418 of schedule 1 and are allowed to put the remaining balance on Schedule 8 as a class 14.1 asset.

If you have deducted the Incorporation costs on your financial statements then you would not use line 418 of the Schedule 1 or else you would be deducting the incorporation fees twice.

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(Whoops, @snoplowguy was answering at the same time as I was writing my reply.)

I just tried in TaxCyle.

Since the incorporation costs are an asset on the balance sheet, they are reported there. Then there is a corresponding CR/DR for the amortization expense of the incorporation between the income statement and the accumulated amortization on the balance sheet. Schedule 1 will add back the amortization as it should, assuming that you have posted it to the correct GIFI code. (Which I did.)

Then following the guide can deduct on Schedule 1, line 418 as per the T2 guide.

Net result is NIL change, as expected.

Would it be possible that you claimed the incorporation cost as a legal expense, rather than listing it as an asset, then amortizing the asset? You have to recall that an incorporation is an asset, not an expense.

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Thank you @snoplowguy and TimParris for your guidance. I have applied as you mentioned and now making sense to me, how to approach in tax cycle.

Regards,

Harry

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While there is a balance sheet GIFI code for incorporation costs, according the the Handbook (3064.53), they do not meet the definition of an asset and should be expensed when incurred for accounting purposes.

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Hi Matthew,

In my case, I am not preparing financials according to ASPE ( so I am not referencing to any GAAP in my financials).

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" Incorporation Costs After 2016

As per the 2016 budget, in order to reduce compliance burdens in respect of incorporation expenses, a separate business deduction will be provided (new s. 20(1)(b)) so that the first $3,000 of incorporation expenses will be expensed rather than added to a CCA class. Incorporation expenses in excess of $3,000 will be included in new Class 14.1. This measure will apply as of January 1, 2017, to expenses incurred in 2017 and later years."

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" Class 14.1 (5%)

Starting January 1, 2017, include in Class 14.1 property that:

  • is goodwill
  • was eligible capital property (ECP) immediately before January 1, 2017, and is owned at the beginning of that day
  • is acquired after 2016, other than:
    • property that is tangible or corporeal property

    • property that is not acquired for the purpose of gaining or producing income from business

    • property in respect of which any amount is deductible (otherwise than as a result of being included in Class 14.1) in computing the income from the business

    • an interest in a trust

    • an interest in a partnership

    • a share, bond, debenture, mortgage, hypothecary claim, note, bill or other similar property

    • property that is an interest in, or for civil law a right in, or a right to acquire, a property described in any of the above sub-bullets

Examples for farming are milk and eggs quotas.

Examples for business, professional, and fishing are franchises, concessions, or licences for an unlimited period.

For tax years that end prior to 2027, properties included in Class 14.1 that were acquired before January 1, 2017, will be depreciable at a CCA rate of 7% instead of 5%. Transitional rules will apply.

Properties that are included in Class 14.1 and acquired after 2016 will be included in this class at a 100% inclusion rate with a 5% CCA rate on a declining‑balance basis and the existing CCA rules will normally apply.

Note

Property in this new Class 14.1 is excluded from the definition of capital property for GST/HST purposes."

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance/classes-depreciable-property.html#class14.1

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TaxCycle Reference

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@yours.harry

Harry,
I post expensed items for annual returns and incorporation costs less than $3000 to GIFI 8760.

If you are preparing a compilation only then post to 8760 only.

If you are preparing a full bookkeeping GL, and, if you wish to capture small expenses to their asset account, then I would post the incorporation costs to fixed asset class 14.1 addition on your GL use an AJE to adjust to expense GIFI 8760.

These types of AJE are useful for classes in which the individual items are well under the capitalization threshold but the are significant in total such as tools for trades, golf carts for golf course operators, etc.

However, for T2 preparation purposes you may run into problems in over-riding the Schedule 8 calculations. Some tax preparation apps allow this override without other impact. In TaxCycle I would not recommend using overrides.

Instead I would prepare a separate Financial Statement called a Changes to Fixed Assets. This is also known as Fixed Asset Continuity. I would include a statement of balances (opening balance, closing balance), amortization expenses, adjustments, as well as annual transactions of additions and proceeds with GST/HST. I find this very helpful to clarify inventory assets, various types of vehicles, under threshold amounts which need to be tracked, over limit amounts, per cent of business use, etc.

I hope this helps.

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Hi Dominique,

Thank you for your very detailed response.

I called CRA yesterday to see what they suggest re incorporation cost under $3K for T2 return purposes. The senior agent of CRA, i talked with, mentioned that there is no GIFI code specifically for incorporation cost as expense item. Instead, I will enter this cost in Sch 8 as addition and then disposition in the same year ( for under $3K) for class 14.1. After that, He pointed me to line 418 (specifically added in T2 return for adjustment) of Sch 1 to manually enter there my incorporation cost of under $3K to expense.

For my financials statements presentation purposes, I presented incorporation cost under $3K as “other asset” and contra asset - the accum. amortization for full amount of incorporation cost under $3K (to make Net NIL) and same thing i did for Sch 100 of T2 return.

Regards,

Harry

@yours.harry

Hi Harry,
I really appreciate your feed back. I find these case specific questions very useful as background for tax accounting and dealing with CRA.

I would like to clear up an apparent misunderstanding regarding my post. Hopefully this will clarify matters.

Incorporation fees can be expensed under $3000 or capitalized at $3000+.

I would not add the incorporation costs on Schedule 8 or as an asset. I would simply expense them under GIFI Line 8760, Business tax, fees, licenses, due, memberships. Of all the GIFI expense codes, this comes closest to incorporation costs. I put the annual incorporation fees in this account as well.

The reason that I would not add it Schedule 8 as class 14.1 is because you would need to override the amortization rate to fully expense this amount. This can only lead to unnecessary complications.

My point regarding capitalizing some assets <$500 was to point out that if and only if the aggregation of those small costs is material to the business, then you may consider it. For example, many trades can easily spend $20,000 or more in small tools in the first year of business even though most of these tools cost <$500 on an individual basis. However, it is more accurate and more meaningful to the business to track their investment in tools by capitalizing them.

I would be very cautious to take bookkeeping advice from a CRA call centre agent. They are not trained for this and may give you inaccurate advice. I would consider assistance from a senior resource officer when researching tax topics such as the new assets classes if and only if they provide detailed Income Tax Act (ITA) and Excise Tax Act (ETA) references. In my experience very few first or second level CRA call centre agents have any bookkeeping, financial statement preparation, or tax preparation experience.

If I were you, I would learn from the CRA Resource officer how to search Canlii for references in both the ITA and the ETA.

I would invest in the following reference books:

Byrd & Chen’s Canadian Tax Principles, student edition with problems.

Preparing Your Corporate Tax Returns, Wolters Kluwer.

I would invest in Preparing Your Tax Returns (Personal), Wolters Kluwer.

I would search Google for references on such sites as TaxTips, Bean Counter, and other reputable sites.

Sometimes I might find useful references on YouTube and Udemy.

I might consider such excellent tax training at Video Tax News or The Knowledge Bureau.