T2 Schedule 1 - Covid Assistance Inconsistencies with CRA

Bug Reports
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I am reporting this topic in “Bug Reports” because there is an inconsistency between the T2 Guide and how TaxCycle is handling the newest instructions. This may not be a bug in the software, it could very well be a bug or outright error in the latest version of the T2 Guide.

The T2 Corporation Income Tax Guide - Schedule 1 Instructions are found here;

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012/t2-corporation-income-tax-guide-chapter-3-page-3-t2-return.html#P1273_106599

The newest version of the guide has quietly and deliberately inserted the following instruction as the very first sentence regarding the Schedule 1 instructions. “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”.

T2 Instructions
T2 Instructions1180×191 65.6 KB

Unfortunately, even if you include the descriptions on line 605 for each of the subsidies received as instructed by the CRA, TaxCycle ignores those lines completely unless you enter an amount on line 295. TaxCycle issues a warning if there is a description on line 605 but zero entered on line 295. Essentially, TaxCycle is unable to handle the instructions contained in the T2 Guide.

The next two images demonstrate this;

The first image is a screenshot of a T2 Schedule 1 as it is being completed in the software. The second image is a screenshot of the actual Schedule 1 that is published by the software and does not contain any reference to the entries made on line 605.

T2 Schedule 1
T2 Schedule 11260×479 183 KB

T2 - Schedule 1
T2 - Schedule 1889×768 249 KB

It seems that CRA’s request to enter a description with an amount on line 605 but no corresponding entry on line 295 would provide a solution to the problem of Covid Assistance being included in the financial statements of the corporation but also required to be added again on the schedule 1. It looks like the CRA wants to verify that Covid Assistance has been reported, so the description on line 605 of schedule 1 (which is normally an efile transmitted field) sort of accomplishes that. Unfortunately, TaxCycle doesn’t transmit the information from line 605 on efile if there is a zero on line 295. I even checked a .COR file and there are no entries in the transmission unit for line 605 even though the line contains data and is normally a transmitted field if it has an entry on it.

Once again, I’m not saying the bug is with the software, the bug could be with the T2 Guide itself. What I am confirming is the software is unable to produce what the current version of the T2 guide is requesting.

Perhaps one of the fine tax analysts at TaxCycle who are privileged enough to be able to speak with someone at CRA that has answers might be able to sort out how exactly they want the Covid Assistance reported. Unfortunately, I’m not high enough up the food chain to have access to anyone at the CRA who can actually answer anything other than basic questions.

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@snoplowguy I appreciate your post about this. I have been following the discussions on how to report COVID19 assistance in tax returns in various forums/groups. It’s interesting how the T2 guide suddenly comes up with a new take on this. Hopefully, they will stick to this one permanently. One thing I can tell you is that the CRA T2 guide is generally published by authors without any regards to tax software vendors and their products. I had no idea about this until you first reported it in our forum 3 days ago.

So, first, generally, for a T2 schedule in TaxCycle, the CRA does not want a line number or a value to be transmitted to the CRA unless the value is greater than a zero. However, the CRA will specify to us if they require zero value to be submitted for a specific line number (“zero value line number”). Unfortunately, line 295 in schedule 1 is not a “zero value line number” as you have discovered.

I did send an email to the CRA if they are expecting software vendors to allow a zero value to be submitted for this line and when (ie. the next approval would be for the Nov T2 release which might be too late by then). I would expect that the total line 296 would also have to be a “zero value line number” in this case. Once I hear back, I will let you know.

So, in the meantime, there is no workaround to prepare according to what the latest T2 guide says. But having said that, the CRA’s system would not expect line 295 to be a zero value either but I am not 100% sure until they provide some further information/clarification about this.

Steven

1 Like
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Thanks for looking into this Steven.

I’m not sure what is so special about Covid assistance as opposed to other income that the CRA feels it needs to have its own home on the Schedule 1. Presumably they want to see it on the Schedule 1 to make it easy to cross reference those amounts with their own records to verify the Covid Assistance has been reported. If they wanted to handle this particular income in this fashion, one would think they could have quite easily added a Schedule 1 line somewhere between 401 and 498 that says: Deduct: Covid Assistance already reported in financial statements (just like they do with Gain on Sale of Assets and other items). I can’t think of many situations where a set of company’s financial statements would have excluded Covid subsidies… as these items do affect the corporation’s cash flows, so it would be difficult to exclude the items and still balance your books.

In the mean time, while we wait for clarification, for something like the forgivable portion of CEBA I am making the income entry on line 9980 of Schedule 125 and then adding either the 10,000 or 20,000 on line 605 - 295 of Schedule 1. The effect of using line 9980 is it automatically deducts that same amount on line 705 - 395 so the Covid Assistance does not get double reported.

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Line 9980 is unrealized gains and losses. Do you really want to post Covid Assistance there?

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Well… not at all, but for lack of any guidance… and CRA has specified not to include Covid Assistance on line 8242.

Lets say I have a client that has received $40,000 in CEBA and by their corporate year end has paid back $30,000. For all intents and purposes they have essentially qualified to have the remaining $10,000 forgiven as they have met the criteria. The only thing they haven’t received is a certificate or statement of account showing they no longer owe the $10,000. Presumably this official notification of zero owing will come at some point during 2021 or 2022.

In my mind this $10,000 could be considered an unrealized gain, as the actual income is not realized until their CEBA account shows a zero balance and the 10,000 in forgiveness is deemed to be realized.

Once again, I don’t like it when things don’t work and you have to find ways to make them “fit” because legislators are too short sighted to see how their policies apply to real world situations.

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Makes sense. So where do you put CEWS if we can’t put it on 8242?

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It’s odd that they slipped this change into the T2 guide after many of the T2 returns for periods in which these subsidies were received have already been filed.

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“The only thing they haven’t received is a certificate or statement of account showing they no longer owe the $10,000. Presumably this official notification of zero owing will come at some point during 2021 or 2022.
In my mind this $10,000 could be considered an unrealized gain, as the actual income is not realized until their CEBA account shows a zero balance and the 10,000 in forgiveness is deemed to be realized.”
.
.
Ehhh…
Isn’t that like saying that your customer has given you a cheque to pay his Account, you have deposited in your bank, but you refuse to take the amount out of Accounts Receivable because you haven’t received the bank statement showing it yet

9

I believe that the loan agreement says that the $10,000 is forgiven only when the $30,000 is paid back.

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I am crediting Payroll Expense… again… not an optimal solution.
If I was going to add the CEWS subsidy on the schedule 1 I still would need to manually subtract that same amount from line 395 in order to add it on line 295 otherwise the income would be counted twice.

In my small mind not exactly. The 30,000 has been paid back but the remaining 10,000 (out of the 40,000) has not. Technically as of that date the company has met the criteria for the 10,000 forgiveness to be earned, however none of the institutions have cancelled the 10,000 out yet. It still shows as owing. Presumably, with all of these extensions a company could go and re-borrow the $30,000 again (the credit line is still available) and maybe they won’t be in a position to repay the 30,000 for a second time. I think with the latest extension you can draw on your CEBA loan until November 30th, 2021 now so even if you have paid in full you could still draw again and maybe not meet the criteria if for some reason you can’t pay back.

I suppose there are other reasons why a business who has paid back the 30,000 may not qualify for the 10,000 forgiveness if the CRA came along and decided they were not entitled to the CEBA even though a preliminary review suggested they did qualify for CEBA.

It’s still a real mess…

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@snoplowguy

Page 26 of the new version of T4012-20e now says:

"Use Schedule 125 to report income from the COVID-19
programs. Include the amount you received for the tax
year on line 8242 – Subsidies and grants."

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@snoplowguy
“Technically as of that date the company has met the criteria for the 10,000 forgiveness to be earned, however none of the institutions have cancelled the 10,000 out yet.”

Aah - upon re-read, I see you were speaking about a hypothetical - not an actual client who had already asked the bank to cancel the $10,000.

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Thanks Joe, that has changed from last week. I specifically checked last week and that guide still said DO NOT report Covid-19 program income on line 8242. What a circus.

They seem to be fighting over the steering wheel of the Titanic… and we are the passengers. :grinning:

I suppose this means that Rein is correct now. :slightly_smiling_face:

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I really can’t get too excited about where to add/deduct an item. Some banks set up CEWS as a line of credit with a $40,000 (or $60,000) limit, so the forgivable portion will change as the line of credit is accessed. Others just deposit the whole thing in the client’s bank account. As soon as the loan is granted, the 25% becomes income, full stop. Check out CPA guidance on this. I use CaseWare, so I code the forgivable portion as grants & subsidies. Export GIFI to TaxCycle, and it automatically gets taxed. Full stop. If CRA wants statistics on who got what, they can get it from Export Development Canada. EDC processes the application and approval processes.

The accounting mechanics of CEWS is similar to provincial investment tax credits from years ago. These normally went hand in hand with the federal counterpart, but they were deducted on Sch.8 in the year utilized, not the following year as is the case for federal ITC’s. If credits subsequently expired prior to being used, which could easily happen, the expired portion was added back to the related asset for accounting purposes, and added back on Sch.8. Similarly, if the taxpayer can’t repay 75% of the CEWS loan, the 25% gets deducted for accounting purposes and tax purposes. By this time, CRA has already got the tax on it, and may never have to refund it, if the taxpayer goes under.

Does anyone else remember when the CICA Handbook was one 8.5"x 5.5" binder? And, no, I did not use a hand-crank adding machine. But I know people who did.

15

@snoplowguy
So, I finally heard back from the CRA. In the fall update, they will ask software vendors to update to require line 295 in S1 to be a “zero value line number”. However, I let them know that the timing is late and that we will be making changes to TaxCycle T2 as soon as possible to allow our customers to prepare S1 according to the latest version of the T2 guide. So, I will try to update T2 in the next release (either this week or in the next 2-3 weeks).

So, as I mentioned previously, column 605 and 295 in S1 go hand in hand, meaning that column 295 must have a value greater than zero for both column 605 and 295 to print as well as to be transmitted to the CRA.

With my change, as long as there is a description in column 605, both column 605 as well as the corresponding amount in column 295 will print and transmit to the CRA even if column 295 = 0.
This should allow you to enter COVID19 assistance according to the latest T2 guide.

image
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In addition, if S1 contains no “book to tax” adjustments amounts but only the COVID19 assistance description in column 605, S1 will be “used” in TaxCycle T2 and transmitted to the CRA. (whereas previously, this scenario would not have made S1 “used” or transmitted to the CRA).

So, stay tuned.

Steven

2 Likes
16

Thank you VERY much for this Steven!

The CRA have finally realized their initial instructions for handling Covid-19 assistance did not work in a practical application, and have now addressed the issues with this remedy/workaround.

It seems the CRA now expects Covid-19 Assistance is to be handled as follows;

  • Covid Assistance gets reported on Line 8242 - Subsidies and Grants on the Schedule 125

  • Essentially a “memo” or “note” is required to be logged onto the T2 Schedule 1 to indicate how much of each type of assistance was received by the corporation. This is done by making an entry on line 605 (which is a description field) to describe the assistance as well as the amount. The amount gets entered as part of the description. Since line 295 is a zero no actual dollar amount gets posted to the Schedule 1.

Once again, all this really does is gives the CRA an easy way to cross check what the corporation has likely reported for Covid assistance with their own records.

This is definitely a workable solution.

Thanks again for looking after this. :slightly_smiling_face:

1 Like
17

New version is now available to download. We will turn on auto update next week.

Steven

1 Like
18

Thanks for getting this done so quickly! It is very much appreciated.
Have a great Canada Day.

1 Like
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