How to File T4 Slips and the T4 Summary in Canada (2027 T4 Deadline)

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How to File T4 Slips and the T4 Summary in Canada (2027 T4 Deadline)

Targeted Accounting

How to File T4 Slips and the T4 Summary in Canada

Every employer in Canada closes the payroll year the same way: a T4 slip for each employee and a T4 Summary that totals them, filed with the CRA and handed out to staff. Employees use the slip to file their personal returns. The CRA uses it to check that the CPP, EI and income tax you withheld all year actually reached it.

Most T4 problems are not filing problems. They come from small payroll errors made during the year that only surface when the totals have to match. This guide covers who gets a T4, the 2027 deadline, the boxes small employers get wrong and how to reconcile before you file. It is part of our handbook on how to do payroll in Canada.

Who Needs a T4 Slip and Who Gets a T4A Instead

You prepare a T4 for an employee you paid during the calendar year if any of these apply:

Pay over $500: you paid them more than $500 in remuneration.
Deductions: you were required to deduct CPP, EI or income tax, whatever the amount.
Pension adjustment: they earned one under your registered pension plan or deferred profit sharing plan.
Group term life: you provided taxable group term life insurance, which needs a T4 even if nothing else was paid.

An owner-manager who takes a salary from their own corporation gets a T4 like any other employee.

Contractors do not get a T4. If you paid a self-employed individual or a corporation more than $500 in fees for services during the year, or deducted tax from the payment, the amount goes on a T4A in box 048, without GST/HST. Construction businesses have a separate slip for subcontractor payments: see our guide to T5018 slips for contract payments.

T4 Deadline 2027: When T4 Slips for the 2026 Tax Year Are Due

T4 slips and the T4 Summary are due on the last day of February after the calendar year. When that day falls on a weekend or a public holiday, the CRA treats the return as on time if it receives it, or it is postmarked, by the next business day. February 28, 2027 is a Sunday, so the 2026 T4 return is due Monday, March 1, 2027.

Employees must also have their copies by the last day of February. Paper copies are fine, but to send slips by email you need the employee’s written consent first. Late distribution carries its own penalty of $25 a day per slip, with a $100 minimum and a $2,500 maximum. Our 2027 tax deadlines in Canada calendar lists every other CRA date for the year.

How to File T4 Slips Online: Web Forms and Internet File Transfer

If you file more than five slips of the same type for a calendar year, you must file electronically. The threshold dropped from 50 to five for returns filed on or after January 1, 2024, so a business with six employees can no longer mail paper slips. Filing 6 to 50 slips on paper when you should have filed electronically costs $125, on top of any late-filing penalty.

The CRA’s page on how to file information returns describes two electronic routes:

Web Forms: an online form on the CRA website that handles up to 100 slips, including amended and cancelled ones. It suits a small employer without payroll software.
Internet file transfer: an upload of an XML file created by payroll, commercial or in-house software.

With five or fewer slips of a type, paper filing is still allowed. Include one copy of each slip with the summary and keep a copy of everything you send.

T4 Boxes Small Employers Get Wrong

The CRA’s RC4120 guide to filing the T4 slip and summary explains every box. These are the ones we see go wrong most often on small payrolls:

Box	What it reports	Common mistake
14	Total employment income before deductions, including taxable benefits	Reporting a benefit under a code but leaving it out of box 14
16 and 16A	Employee CPP and CPP2 contributions deducted	Leaving 16A blank instead of entering 0
17 and 17A	QPP and QPP2, only when the province of employment is Quebec	Using these boxes for Ontario staff
18	Employee EI premiums deducted	Adding the employer’s share
22	Income tax deducted	Including amounts garnished for the employee’s old tax debts
24	EI insurable earnings, capped at $68,900 for 2026	Copying box 14 when pay exceeds the cap
26	CPP pensionable earnings, capped at $85,000 for 2026	Stopping at $74,600 and ignoring CPP2 earnings
28	CPP, EI or PPIP exemption	Ticking an exemption that only applied for part of the year
44 and 46	Union dues and charitable donations deducted from pay	Leaving them off, so the employee misses the deduction or credit

Boxes 16 and 18 hold only the employee’s share. Your employer CPP and EI go on the T4 Summary, never on the slip. For an employee paid $90,000 in 2026, box 24 shows $68,900, box 26 shows $85,000 and box 16A shows $416 of CPP2, which is $85,000 less $74,600, times 4%.

Taxable Benefits That Belong on the T4 Slip

A taxable benefit is added to box 14 and also reported with a code in the Other information area at the bottom of the slip. The codes small employers use most:

Code 30, board and lodging: housing or meals you provide.
Code 34, personal use of an employer’s automobile: the benefit from driving a company vehicle for personal trips.
Code 36, interest-free and low-interest loans: the interest benefit on money you lend an employee.
Code 40, other taxable allowances and benefits: the catch-all, including employer-paid group term life premiums and cash or near-cash gifts.

Gift cards catch a lot of owners. The CRA treats cash and near-cash gifts as always taxable, so a $100 holiday gift card belongs on the T4. Non-cash gifts and awards are treated differently: up to $500 a year in total is not taxable for an employee who deals with you at arm’s length. The CRA’s chart of taxable benefits shows the T4 code for each benefit and whether CPP and EI apply.

Reconcile the T4 Summary to Your Payroll Remittances

The T4 Summary totals every slip and adds the employer share: employee CPP (line 16), employer CPP (line 27), employee EI (line 18), employer EI (line 19) and income tax (line 22). Together they make total deductions reported (line 80). Subtract what you remitted during the year (line 82) and you get a balance owing or an overpayment.

Here is a one-employee example on a $55,000 salary in 2026, with $7,800 of income tax withheld:

T4 Summary line	Amount
Employee CPP contributions (16)	$3,064.25
Employer CPP contributions (27)	$3,064.25
Employee EI premiums (18)	$896.50
Employer EI premiums (19)	$1,255.10
Income tax deducted (22)	$7,800.00
Total deductions reported (80)	$16,080.10
Remittances during the year (82)	$15,880.10
Balance due	$200.00

A balance due usually points to a short or missed remittance, such as a bonus paid outside the normal cycle. Find the cause before you file rather than after.

Once the return is in, the CRA runs a Pensionable and Insurable Earnings Review (PIER), recalculating the CPP and EI each slip should show and comparing it with what you reported. If the figures differ, it sends a PIER report with a listing of the employees affected and asks for a reply within 30 calendar days. Our guide to payroll remittance in Canada covers the remittance side of the year.

How to Amend or Cancel a T4 Slip

Mistakes found after filing are fixed with amended or cancelled slips, not a second original return.

Amending: correct the slip and mark it “Amended”. Web Forms accepts amended slips if you filed electronically. On paper, send one copy to the CRA with a letter explaining the change and give the employee two copies.
Cancelling: if a slip should never have been issued, for example a duplicate or a slip for the wrong person, file it marked “Cancelled” the same way.
Summary: do not file an amended T4 Summary on paper.

A PIER report changes the process. Do not amend the slips yourself in response to one. Reply to the report with any changes it needs, and the CRA issues the amended slips.

T4 Late-Filing Penalties

The penalty for a late T4 return depends on how many slips are late. For T4 returns the CRA applies a relieving administrative policy, and the penalty is the greater of $100 and the amount in this table, according to its page on when to file information returns:

Slips filed late	Penalty per day (up to 100 days)	Maximum penalty
1 to 5	Flat penalty, not based on days	$100
6 to 10	$5	$500
11 to 50	$10	$1,000
51 to 500	$15	$1,500
501 to 2,500	$25	$2,500
2,501 to 10,000	$50	$5,000
10,001 or more	$75	$7,500

A business with eight employees that files two weeks late would face 14 days at $5, or $70, so the $100 minimum applies. The late-filing penalty is separate from the penalty for filing on paper when you had to file electronically and from the penalty for giving employees their slips late.

Year-End T4 Checklist for Employers

December: confirm every employee’s SIN, legal name and address are on file and correct.
Last pay of the year: run taxable benefits such as gift cards, vehicle use and group life premiums through payroll so the deductions are taken in the right year.
January: reconcile year-to-date payroll to the general ledger and to the remittances the CRA shows on your payroll account.
February: review boxes 16A, 24, 26 and 28 for every employee, file the return and give employees their slips.
Quebec staff: employees who report to work in Quebec also need an RL-1 slip filed with Revenu Québec.
Records: keep the slips, the summary and your working papers for at least six years.

If you are adding staff in 2027, our checklist for hiring your first employee in Canada covers the setup side, from the payroll account to WSIB.

Rules and figures reflect CRA guidance as of October 2026. This is general information, not advice for your situation.

Written by Targeted Accounting

CPA-led bookkeeping, payroll and outsourced CFO for Canadian businesses, with 10+ years of running and cleaning up small business books.

Want Your T4 Slips Prepared and Filed for You?

We prepare and file T4s, T4As and T5018s for small businesses every winter, after reconciling the year’s payroll so the summary matches what was remitted. If you run payroll yourself, we can review your slips before they go in. See our payroll services for small business or get in touch.

Hiring Your First Employee in Canada: How to Set Up Payroll for One Employee

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Hiring Your First Employee in Canada: How to Set Up Payroll for One Employee

Targeted Accounting

How to Set Up Payroll for Your First Employee in Canada

Your first hire changes your relationship with the CRA. Once you pay an employee, you are responsible for withholding income tax, CPP contributions and EI premiums from every cheque, adding your own employer share, sending it all to the CRA on time and reporting it on a T4 at year end. Ontario adds its own rules on wages, hours, vacation and workplace insurance.

This checklist covers what to set up before the first pay day, in the order we would do it for a client, with the 2026 figures that drive the real cost of a hire. It builds on our handbook on how to do payroll in Canada, which covers the payroll cycle once it is running.

Employee or Contractor: Check Worker Status First

Before you set anything up, confirm the person really is an employee. Calling someone a contractor does not make them one. The CRA looks first at what both sides intended, then tests that intent against how the work is actually done. Its guide RC4110, Employee or Self-Employed? sets out the factors it weighs:

Control: who decides how, when and where the work is done.
Tools and equipment: who supplies them and who pays for them.
Helpers: whether the worker can hire assistants or send a substitute.
Financial risk and investment: whether the worker carries fixed costs, unreimbursed expenses or capital of their own.
Opportunity for profit: whether the worker can earn more, or lose money, through how they price and manage the work.

If the answers point to employment, run the person through payroll from day one. If the CRA later decides your contractor was an employee, you can be assessed for the CPP and EI that should have been deducted as well as your employer share. A worker who invoices through their own corporation raises a separate issue on their side: see our guide to the personal services business rules.

Open a CRA Payroll Account on Your Business Number

Payroll runs through its own CRA program account, the payroll deductions account, which carries the letters RP. It sits on your nine-digit business number, so the full account number looks like 123456789 RP 0001. If you do not have a business number yet, you get one when you register. Our CRA business number guide explains the options.

The CRA says you must register before your first remittance is due. For a new employer that is the 15th of the month after the month you first withhold deductions. Hire someone on March 11, pay them on March 25, and the first remittance is due April 15. If you pay before the account is open, you still have to calculate and remit the deductions on time, so open the account a few weeks before the start date rather than after the first pay.

Collect the SIN and TD1 Forms Before the First Pay

Two pieces of paperwork control the first cheque.

Social insurance number: you must ask for the employee’s SIN within three days of the day they start work, and keep a dated note of the request. If the employee does not provide it, tell Service Canada within six days of their start date. A $100 penalty can apply if you cannot show a reasonable effort to get it. If the SIN starts with 9, check the expiry date on the employee’s immigration document.
TD1 forms: the employee completes the federal TD1 and the Ontario TD1ON before you pay them. These set the personal tax credits used to calculate income tax on each cheque. If an employee does not fill one out, deduct tax as if they claimed only the basic personal amount.

Collect direct deposit details, an emergency contact and the signed employment contract at the same time. Keep the TD1s with your payroll records, because a CRA payroll examiner will ask for them.

Ontario Employment Standards for a First Hire

Ontario’s Employment Standards Act (ESA) sets the minimum terms for most employees in the province. The rules a first-time employer most often trips over:

Minimum wage: the general rate is $17.95 an hour from October 1, 2026, and the student rate is $16.90, according to Ontario’s minimum wage guide.
Overtime: most employees earn 1.5 times their regular rate for every hour over 44 in a work week.
Vacation: two weeks of vacation and at least 4% vacation pay for employees with under five years of service, rising to three weeks and 6% at five years. Our guide to vacation pay in Canada covers accrual and payout.
Public holidays: Ontario has nine, each with its own public holiday pay calculation.
Wage statements: on or before each pay day, give a written statement showing the pay period, wage rate, gross pay, each deduction and net pay. Email is fine if the employee can print it.

Put the job in writing. A contract covering pay, hours, duties and termination protects both sides. Employers with 25 or more employees must give new hires specific written information before their first day, and it is a sensible habit for a business hiring its first person too. You also have to give each new employee the current ESA poster within 30 days.

The ESA has no probation period as such. An employee with less than three months of service is not entitled to notice of termination. After three months the minimum is one week, and it grows with service. A probation clause in the contract only helps if it is drafted properly, which is worth a lawyer’s review.

WSIB Registration and the Employer Health Tax

Most Ontario businesses with employees must register with the Workplace Safety and Insurance Board (WSIB) within 10 calendar days of hiring their first employee. Premiums depend on your industry classification. Some industries do not have to register but can opt in. WSIB’s examples include banks, trust and insurance companies, private day cares, travel agencies, photography businesses, and barber shops and many hair salons. Construction is stricter, and owners in that industry generally need coverage even without employees. Check where you fit on the WSIB registration page before the start date.

Ontario’s Employer Health Tax (EHT) is the other provincial payroll cost. Eligible employers are exempt on the first $1 million of annual Ontario payroll, provided total payroll, including associated companies, is under $5 million. A business hiring its first employee will almost always fall inside the exemption, and you do not need to register for EHT while your payroll stays below it.

Choosing a Pay Frequency and Payroll Remittance Due Dates

The ESA requires a regular pay period and a regular pay day but leaves the frequency to you. Weekly, bi-weekly, semi-monthly and monthly all work. Bi-weekly suits hourly staff because it lines up with timesheets. Semi-monthly suits salaried staff because every cheque is the same.

The CRA’s deadlines follow the date you pay, not the pay frequency. A new employer is a regular remitter: the deductions withheld from every pay in a month, plus your employer share, must reach the CRA by the 15th of the following month. A new small employer whose monthly withholding is under $1,000 and whose compliance history is perfect may qualify to remit quarterly instead. Late remittances are penalized, and even a payment made on the due date can attract a penalty if it is not made at a financial institution. Our guide to payroll remittance due dates and remitter types sets out the full schedule.

The Employer Cost of Hiring a $55,000 Employee in 2026

A salary is not the full cost of an employee. On top of gross pay, you match the employee’s CPP contributions and pay 1.4 times their EI premiums. Using the 2026 rates from the CRA’s CPP contribution rates page and its EI premium rates page:

Employer cost	2026 rate	Earnings it applies to	On a $55,000 salary
CPP (employer share)	5.95%	$3,500 to $74,600	$3,064.25
CPP2 (employer share)	4%	$74,600 to $85,000	$0.00
EI (employer share)	1.4 × 1.63%	Up to $68,900	$1,255.10
Ontario EHT	Exempt	First $1 million of payroll	$0.00
Total on top of salary			$4,319.35

The CPP figure is $55,000 less the $3,500 basic exemption, times 5.95%. The EI figure starts with the employee’s premium of $55,000 × 1.63% = $896.50, then multiplies it by 1.4. So a $55,000 employee costs about $59,319 a year before WSIB premiums, benefits and equipment. At higher salaries the statutory costs cap out: the 2026 maximum employer share per employee is $4,230.45 for CPP, $416 for CPP2 and $1,572.30 for EI.

Running the First Pay Run and Keeping Payroll Records

For the first pay, work out gross pay, then deduct CPP, EI and income tax based on the employee’s TD1 claim. The CRA’s free Payroll Deductions Online Calculator (PDOC) will do the math for a single pay. Once you have more than one or two employees, payroll software is usually worth it, because it tracks year-to-date maximums, produces wage statements and prepares T4s. Our comparison of accounting software for Canadian businesses is a good starting point.

After the first run, check that net pay matches what reached the employee’s account, that the deductions and your employer share are booked to a payroll liability account, and that the remittance is scheduled before the 15th.

Then keep everything. The CRA requires you to keep paper and electronic payroll records for at least six years after the year they relate to. That includes TD1s, timesheets, pay registers and remittance confirmations.

Record of Employment and T4 Slips at Year End

Two reports bookend the employment relationship. When an employee stops working, for example after a resignation, layoff or leave, you issue a Record of Employment to Service Canada. Our guide to the Record of Employment (ROE) covers the deadlines and reason codes.

Each year, you also report every employee’s pay and deductions on a T4 slip and file the T4 Summary with the CRA by the last day of February. For the 2026 year that day is a Sunday, so the return is on time if the CRA receives it by Monday, March 1, 2027. Our T4 slip filing guide walks through the boxes and the year-end reconciliation.

Rules and figures reflect CRA guidance as of October 2026. This is general information, not advice for your situation.

Written by Targeted Accounting

CPA-led bookkeeping, payroll and outsourced CFO for Canadian businesses, with 10+ years of running and cleaning up small business books.

Want Help Setting Up Payroll for Your First Hire?

Targeted Accounting has helped small businesses with payroll and bookkeeping for 10+ years. We can register your payroll account, set up your first employee, run each pay and file the remittances and T4s, so your first hire does not turn into a CRA notice. See our payroll services for small business or get in touch.

When Should I Incorporate My Business? Signs It Is Time (Canada, 2026)

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When Should I Incorporate My Business? Signs It Is Time (Canada, 2026)

Targeted Accounting

When Should I Incorporate My Business?

Most sole proprietors start asking about incorporation once the business is making real money. The short answer: a corporation saves tax only on profit you leave inside it, and it adds cost and paperwork from day one. If you are still getting to grips with sole proprietorship taxes, start there, because the comparison below assumes you know what you pay today.

This guide runs the numbers with 2026 Ontario rates, then covers the signs it is time, the signs it is not, what incorporation costs and what changes once the corporation exists. For the legal differences between business structures, see our comparison of sole proprietorship vs corporation vs partnership.

How the Tax Deferral Works When You Incorporate

As a sole proprietor, every dollar of profit lands on your personal return in the year you earn it, spent or not. In Ontario, the top combined federal and provincial rate for 2026 is 53.53% on income above $258,482, and the rate on income above $181,440 is already close to 48% (see the CRA’s 2026 federal and Ontario tax brackets).

A Canadian-controlled private corporation pays tax on its active business income first. On the first $500,000 of that income, the federal rate after the small business deduction is 9%, and Ontario’s lower rate dropped from 3.2% to 2.2% on July 1, 2026. That makes the combined small business rate 11.2% for a tax year that starts after June 30, 2026. A tax year that straddles July 1 gets a blended rate. The CRA lists both rates on its corporation tax rates page.

The gap between those rates is the reason to incorporate, but it is a deferral, not a permanent saving. When the corporation later pays you a dividend, you pay personal tax on it. The system is designed for integration: corporate tax plus the personal tax on the dividend comes out close to what you would have paid earning the income directly, and in Ontario it is often slightly more. The deferral is real only for profit that stays in the corporation, where it can be reinvested in the business or held for a slow year, a large purchase or retirement. Our salary vs dividends worked example shows how the money you do take out is taxed.

One limit to know: once savings inside the corporation earn more than $50,000 of passive investment income in a year, the federal small business limit shrinks by $5 for every $1 over, and it reaches zero at $150,000. Ontario’s limit is not reduced this way.

Worked Example: Incorporating at $90,000 vs $220,000 of Profit

Here are two Ontario owners in 2026. Each needs $90,000 a year before tax to live on. If they incorporate, the corporation pays them a $90,000 salary and keeps the rest.

Assumptions: 2026 federal and Ontario brackets, the Ontario surtax and basic personal amounts only, and a corporate rate of 11.2%. CPP, the Ontario Health Premium and other credits are left out to keep the comparison simple. Figures are rounded.

Scenario	Personal tax	Corporate tax	Tax paid now	Tax deferred
$90,000 profit, sole proprietor	$17,700	None	$17,700	None
$90,000 profit, incorporated	$17,700	$0	$17,700	$0
$220,000 profit, sole proprietor	$73,600	None	$73,600	None
$220,000 profit, incorporated	$17,700	$14,560	$32,260	About $41,300

At $90,000 of profit, incorporating saves nothing. All of the profit goes out as salary, the corporation has no income left to tax, and you now pay for a corporate return and a second set of books.

At $220,000, the corporation keeps $130,000, pays $14,560 of tax and has $115,440 left to invest or hold. The $41,300 is not a saving. It is personal tax you will pay later if you take the money out as dividends. The value is the use of that money in the meantime, and the option to draw it in lower-income years. To test your own figures, try our salary vs dividend calculator.

Signs It Is Time to Incorporate Your Business

Profit well above what you spend: If you consistently earn tens of thousands of dollars a year more than you need to live on, the deferral starts to outweigh the extra accounting cost. The larger and steadier that surplus, the stronger the case.
Liability exposure: A corporation is a separate legal person, so business debts and claims generally stay with it. It does not shield you from your own professional negligence or from loans you personally guarantee, and lenders usually ask owners for a guarantee, so insurance still matters.
Plans to sell: A sole proprietor sells business assets, and those gains do not qualify for the lifetime capital gains exemption. Shares of a qualifying corporation can, and the 2026 limit is $1,275,000. The corporation has to meet asset tests over the 24 months before a sale, so incorporating well ahead matters. Our guide to the lifetime capital gains exemption in Canada explains the tests.
Clients that require it: Some larger clients, public sector buyers and staffing agencies only contract with corporations.
Hiring and growth: Once you have staff, a lease and equipment loans, a separate entity makes contracts, financing and bringing in a partner cleaner.

When Incorporating a Sole Proprietorship Does Not Pay Off

Incorporation rarely makes sense when you spend all the profit. If every dollar comes out as salary or dividends each year, you pay roughly the same tax as before, plus the cost of a corporate return, separate books and payroll filings.

It can also backfire for a consultant with one client who would be an employee of that client if the corporation were not there. The CRA can treat that corporation as a personal services business, which loses the small business deduction, pays a higher corporate rate and can deduct very few expenses. Before incorporating a single long-term contract, look honestly at who controls the work, who supplies the tools, who carries the risk and how easily you could take on other clients.

Early losses are another reason to wait. As a sole proprietor, a business loss can offset your other income, such as employment income from a job you are leaving. A corporation’s losses stay in the corporation and can only be used against its own future profit.

What Incorporation Costs in Ontario and Federally

Government fees are modest. The real cost is the ongoing accounting.

Ontario incorporation: $300 to file articles of incorporation through the Ontario Business Registry, and no fee for the annual return under the Corporations Information Act (see the Ontario Business Registry fee schedule).
Federal incorporation: $200 online with Corporations Canada, plus $12 for each online annual return (see Corporations Canada fees). A federal corporation gets name protection across Canada but still has Ontario filings to keep up.
Annual T2 and financial statements: Every corporation files a T2 return within six months of its year-end, even in a year with no income, along with financial statements, usually a compilation. Our T2 tax return guide covers what goes into it. This is normally the largest ongoing cost.
Separate bank account and bookkeeping: The corporation’s money is not your money. Paying personal costs from the business account creates shareholder loan problems at year-end.
Payroll: If you pay yourself a salary, the corporation needs a payroll account, remits income tax and CPP deductions and files T4 slips by the end of February.

How to Incorporate a Sole Proprietorship: What Changes on Day One

The corporation is a new taxpayer, so most of your setup starts over.

Business number and GST/HST: The corporation gets its own business number and, once registered, its own GST/HST account. The sole proprietorship’s GST/HST account is closed with a final return. A joint election on Form GST44 can let the business assets move across without GST/HST being charged.
Your last T2125: Your personal return reports the sole proprietorship’s income on Form T2125 up to the date the business moved into the corporation.
Contracts and invoices: Update client contracts, invoice templates, your website and payment details to the corporation’s legal name, and ask clients to pay the new entity.
Year-end choice: A corporation can choose a fiscal year-end other than December 31. Many owners pick a quieter month, and the first tax year can run up to 53 weeks from incorporation.

The business itself usually moves in through a section 85 rollover. You and the corporation jointly elect, on Form T2057, a transfer price for equipment, inventory, goodwill and other assets anywhere between their tax cost and fair market value, and you take shares in return. That moves the business in without triggering tax on built-up gains. The election has a filing deadline tied to the tax returns for the year of transfer, and late filing brings penalties, so it belongs in the plan from the start.

Rules and figures reflect CRA guidance as of October 2026. This is general information, not advice for your situation.

Written by Targeted Accounting

CPA-led bookkeeping, payroll and outsourced CFO for Canadian businesses, with 10+ years of running and cleaning up small business books.

Is It Time to Incorporate Your Business?

We can run these numbers with your actual profit, draws and plans, and tell you plainly whether a corporation pays off now or later. If it does, we handle the setup, the section 85 rollover and the first T2.

Lifetime Capital Gains Exemption 2026: Who Qualifies and How It Works

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Lifetime Capital Gains Exemption 2026: Who Qualifies and How It Works

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What Is the Lifetime Capital Gains Exemption?

When you sell the shares of your own company, the lifetime capital gains exemption (LCGE) can shelter most or all of the gain from tax. For 2026 the limit is $1,275,000 per person. It is one of the largest tax breaks available to a Canadian business owner, and one of the easiest to lose through poor timing, which is why it belongs in any small business tax planning conversation years before a buyer appears.

This guide covers the current limit, the three share tests, purification, the items that reduce your claim, alternative minimum tax and a worked example. For the wider process of a sale, see our guide to selling a business in Canada.

How the Lifetime Capital Gains Exemption Works in 2026

The LCGE is a deduction against capital gains on qualified small business corporation (QSBC) shares and on qualified farm or fishing property. It is a lifetime amount, so whatever you use on one sale reduces what is left for the next.

The limit rose to $1.25 million for dispositions after June 24, 2024, and indexation resumed in 2026, which brings it to $1,275,000 (see the CRA’s 2026 indexation table). Because half of a capital gain is taxable, the deduction you actually claim on your return is half that amount, $637,500.

The capital gains inclusion rate is still one-half. The proposal to raise it to two-thirds was cancelled in March 2025, and Budget 2025 confirmed the government would not proceed with the Budget 2024 capital gains package. That package included the proposed Canadian Entrepreneurs’ Incentive, so the incentive was never introduced (see Finance Canada’s Report on Federal Tax Expenditures 2026).

Qualified farm or fishing property, such as farmland used in a family farming business, shares the same lifetime limit under its own separate conditions.

Who Qualifies for the Lifetime Capital Gains Exemption: The Three QSBC Share Tests

Your shares must pass all three parts of the CRA’s definition of qualified small business corporation shares:

24-month holding test: For the 24 months before the sale, no one other than you, a partnership you belong to or a person related to you owned the shares.
50% test throughout the 24 months: For that whole period, the company was a Canadian-controlled private corporation and more than 50% of the fair market value of its assets was used mainly in an active business carried on primarily in Canada, or was shares or debt of connected small business corporations.
90% test at the time of sale: On the day of the sale, the company is a small business corporation, meaning 90% or more of its assets by fair market value are active business assets.

Excess cash is the usual problem. Cash the business needs for working capital counts as an active asset. A term deposit or investment account built from years of retained profit does not, and in a profitable company it can push passive assets past 10% without anyone noticing.

If you still run the business as a sole proprietor, the clock has not started. Our guide on when to incorporate a sole proprietorship explains why a planned sale is one of the signals to incorporate.

Purifying a Corporation Before a Sale

Purification means moving passive assets out of the company so its shares pass the tests. Common methods are paying a dividend to take out surplus cash, paying down debt, or moving investments to a holding company or sister corporation, often on a tax-deferred basis. Each route has tax costs and anti-avoidance rules to work through, and each shows up on the company’s T2 corporate tax return, so model it before acting.

The timing trap is the mismatch between the two asset tests. The 90% test looks only at the day of sale, but the 50% test looks back over the full 24 months. If passive assets were more than half the company’s value at any point in that window, a last-minute clean-up passes the 90% test and still fails the 50% test, and the company may need up to 24 more months of clean history before the shares qualify.

Owners who expect to sell within a few years should check the asset mix at every year-end, not when a letter of intent arrives. A holding company set up above the operating company early on lets surplus profit move up regularly, so the operating company stays clean.

Worked Example: Using the LCGE on a $1.6 Million Share Sale

Priya owns all the shares of an Ontario company she started with $100 of share capital. The company passes all three QSBC tests, she has never used her exemption and she has no CNIL or ABIL history. In 2026 she sells the shares for $1.6 million and has no other income that year. Selling costs are ignored.

Item	Amount
Sale price	$1,600,000
Adjusted cost base	$100
Capital gain	$1,599,900
Gain sheltered by the LCGE	$1,275,000
Gain not sheltered	$324,900
Taxable capital gain (one-half of $1,599,900)	$799,950
Capital gains deduction	($637,500)
Taxable income from the sale	$162,450

Using 2026 federal and Ontario brackets, the Ontario surtax and basic personal amounts only, regular income tax on $162,450 is roughly $46,500, under 3% of the sale price. Without the exemption, all $799,950 would have been taxable.

How CNIL, ABIL and Alternative Minimum Tax Reduce the LCGE

Cumulative net investment loss (CNIL): Your investment expenses since 1988, such as interest on investment loans and rental losses, minus your investment income. A CNIL balance reduces the capital gains deduction you can claim. Owners who pay themselves only salary while deducting investment interest can build one without noticing, and taking some dividends in the years before a sale can clear it. The CRA tracks it on Form T936.
Allowable business investment loss (ABIL): If you have claimed an ABIL, for example on shares of or a loan to a failed small business corporation, it reduces the capital gains deduction available in that year and future years.
Alternative minimum tax (AMT): Since 2024, federal AMT is 20.5% of adjusted taxable income above an exemption of $181,440 for 2026. Capital gains are fully included for AMT, and gains sheltered by the LCGE are 30% included.

In Priya’s case, the AMT base is 30% of $1,275,000 ($382,500) plus the unsheltered $324,900, or $707,400. After the exemption, federal AMT before credits is about $107,800, against regular federal tax of roughly $29,700, and she pays the higher amount. AMT paid can be carried forward for seven years and recovered when regular tax exceeds AMT, so a sale year followed by modest income can leave some of it unrecovered. These figures are federal only and before credits, which is why a projection before signing is worth having.

Share Sale vs Asset Sale and the Lifetime Capital Gains Exemption

The LCGE applies only when you sell shares. Buyers usually prefer to buy assets: they get a higher cost base to depreciate, they pick what they take and they leave behind the company’s history and any unknown liabilities. Sellers usually prefer a share sale: one level of tax and access to the exemption. In an asset sale the proceeds land inside the corporation, are taxed there and are taxed again when paid out to you. The gap is usually settled on price, a hybrid deal or both.

Family members can each claim their own exemption. When a family trust holds shares, the gain on a sale can be allocated to adult beneficiaries, each of whom can use their own limit. This only works when the trust held the shares well before the sale, and the tax on split income rules, the trust’s 21-year rule and gains allocated to minors all need careful planning.

Rules and figures reflect CRA guidance as of October 2026. This is general information, not advice for your situation.

Written by Targeted Accounting

CPA-led bookkeeping, payroll and outsourced CFO for Canadian businesses, with 10+ years of running and cleaning up small business books.

Planning to Sell Your Business in the Next Few Years?

The work that protects the exemption happens two or more years before a sale: testing the shares, purifying the company and clearing any CNIL. We can review your structure now and stay involved through the sale with our outsourced CFO services.

Compilation Engagement vs Review Engagement: Which Statements You Need

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Compilation Engagement vs Review Engagement: Which Statements You Need

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Compilation Engagement vs Review Engagement in Canada

At every year end, your accountant prepares financial statements for your corporation, and the report on the front tells the reader how much checking went into them. A compilation means the accountant put your numbers into statement form without verifying them. A review means the accountant asked questions and analyzed the numbers enough to give limited assurance. An audit means the accountant gathered outside evidence to give reasonable assurance.

Most owner-managed corporations in Canada only ever need a compilation engagement. This guide explains what each level involves, who asks for which, how cost and timing change and when it makes sense to move up.

Compilation, Review and Audit: The Three Levels of Financial Statements

Each level follows its own standard in the CPA Canada Handbook and gives a different level of assurance. CPA Québec’s public guide to CPAs and financial statements sets them out this way:

Level	Standard	Assurance	Report title
Compilation	CSRS 4200	None	Compilation engagement report
Review	CSRE 2400	Limited	Independent practitioner’s review engagement report
Audit	Canadian Auditing Standards (CAS)	Reasonable	Independent auditor’s report

Assurance is the accountant’s professional comfort that the statements are free of material misstatement. Reasonable assurance is high but not absolute. Limited assurance means that, based on a narrower set of procedures, nothing came to the accountant’s attention suggesting the statements are materially wrong. A compilation gives none.

What Is a Review Engagement? What the Accountant Does at Each Level

Compilation: the accountant takes your trial balance and other information, proposes adjusting entries for you to approve and prepares the statements. They read the result for obvious errors, but they do not verify balances, confirm receivables or test controls.
Review: the accountant performs inquiry and analytical procedures on every material item, including the notes. Expect questions such as why gross margin dropped four points, why receivables grew faster than sales and what makes up accrued liabilities. You sign a representation letter at the end, and the accountant must be independent of the company.
Audit: the accountant gathers evidence from outside the company. That includes confirming bank balances and receivables with third parties, attending inventory counts, testing samples of transactions back to invoices and assessing internal controls and fraud risk.

For you, the practical difference is how much time your staff spend answering questions and pulling documents.

What a Compilation Engagement Report Says Under CSRS 4200

CSRS 4200 replaced the old Notice to Reader for compiled financial information for periods ending on or after December 14, 2021, as FRAS Canada’s summary of the new compilation standard explains. The compilation engagement report that replaced it is longer and more specific. It states that the accountant compiled the statements from information management provided, that management is responsible for that information, that no audit or review was performed and that the accountant gives no assurance.

The standard also requires the statements to include a note describing the basis of accounting used, so a reader knows how the numbers were put together. Common examples:

Accrual basis at historical cost: revenue recorded when earned, expenses when incurred and equipment at cost less amortization.
Cash basis with selected accruals: mostly cash in and cash out, with specific items such as payables or amortization added.
A basis set by a third party: the basis required by a loan agreement or a funder.

Compiled statements usually do not meet every requirement of Accounting Standards for Private Enterprises (ASPE), and the note should not suggest they do. If a third party such as a lender will rely on the statements, CSRS 4200 also requires the accountant to consider, before accepting the work, whether that reader can ask you for more information or has agreed with you on the basis of accounting.

Who Asks for Compiled, Reviewed or Audited Financial Statements

The CRA: does not require any level of engagement. A corporation must include its financial statement information with the T2 using the General Index of Financial Information (GIFI), along with any notes and the accountant’s report if one was prepared. Schedule 141 asks who prepared the statements and how involved they were. Our T2 tax return guide covers the rest of the filing.
Banks: compiled statements are often enough for smaller operating lines and term loans. As borrowing grows, lenders may write a review requirement into the loan agreement, and the level at which that happens varies by lender.
Bonding and surety companies: contractors who need performance bonds are often asked for reviewed statements, and larger bonding programs can require an audit.
Investors: an outside investor will often write a review or audit requirement into the shareholder agreement.
Grants and not-for-profits: some funding programs ask for reviewed or audited statements, and Ontario not-for-profit corporations have audit and review rules under the Not-for-Profit Corporations Act, 2010 that depend on annual revenue and whether the organization is a public benefit corporation.
Larger companies: audits are generally reserved for companies with public shareholders, significant outside investors or lenders who insist on one.

Compilation vs Review Engagement Cost and Turnaround

Fees depend on the size and condition of your file, so we will not quote numbers here, but the order never changes: a compilation costs least, a review costs more and an audit costs the most. The difference is hours.

A compilation on a clean, reconciled file is mostly the accountant’s time on adjusting entries, the statements and the basis of accounting note. A review adds planning, analysis of every material balance, written questions to management, documented answers, a representation letter and a more detailed file review by the engagement partner. An audit adds third-party confirmations, inventory counts, sample testing and control work, often with time at your premises.

Turnaround follows the same order. A compilation on a clean year-end file is the fastest of the three. A review takes longer partly because it depends on how quickly you answer the accountant’s questions. In both cases the biggest factor is the state of your books when year end arrives.

How Year-End Financial Statements Get Prepared

At a firm that keeps your books and prepares your year end, the process runs in four steps:

Clean file: every bank, credit card and loan account reconciled to the year-end date, receivable and payable lists that agree to the balance sheet, and HST and payroll balances checked against CRA records.
Adjusting entries: amortization, accrued liabilities, prepaid expenses, deferred revenue, inventory, the shareholder loan account and corporate tax payable.
Compiled statements: the balance sheet, income statement, statement of retained earnings and basis of accounting note, with the compilation engagement report, reviewed with you before they are final.
T2 return: the statements feed the GIFI schedules, and the T2 is filed within six months of year end.

Our year-end checklist for new corporations lists what to gather before the file goes to your accountant. Once the statements arrive, our guide on how to read a balance sheet explains what each line means.

When to Move Up From a Compilation to a Review Engagement

Move to a review when someone with a contractual right to one asks for it, not before. The usual triggers:

Bank covenant: your credit facility grows and the new agreement requires reviewed statements.
Bonding: you start bidding on contracts that need a performance bond.
New shareholder: you bring in an investor who is not involved day to day.
Sale planning: you expect to sell in the next few years and want statements a buyer can rely on.

Before you sign a covenant that requires reviewed statements, ask the lender whether compiled statements plus quarterly internal reporting would do. Our guide to financial statements for a business loan covers what lenders look for.

If you need projections and lender-ready reporting rather than just clean books, see our outsourced CFO services.

This is general information as of October 2026, not advice for your situation.

Written by Targeted Accounting

CPA-led bookkeeping, payroll and outsourced CFO for Canadian businesses, with 10+ years of running and cleaning up small business books.

Not Sure Which Level of Financial Statements You Need?

Targeted Accounting prepares compilation financial statements and T2 returns for Canadian corporations, with CPA oversight and 10+ years of experience. Send us your loan or bonding agreement and we will tell you what it requires. See our financial reporting services or get in touch.

Small Business Loan Requirements in Canada: What Lenders Want to See

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Small Business Loan Requirements in Canada: What Lenders Want to See

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Small Business Loan Requirements in Canada

A lender deciding on your loan wants to know two things: whether the business can repay from its own cash flow, and what they can fall back on if it cannot. Your financial statements are the main evidence for both. Clean, consistent statements make the decision quicker. Statements with unexplained balances, late HST filings or personal expenses mixed in slow it down or end it.

This guide covers the package Canadian lenders usually ask for, the ratios they calculate, government-backed options for newer businesses and what to fix before you apply. It is part of our series on financial reporting services for owner-managed businesses.

Business Loan Requirements: The Document Package Canadian Lenders Ask For

Requirements vary by lender and loan size, but expect a request for most of the following:

Year-end financial statements: usually two to three years. BDC’s guide to getting a business loan in Canada notes that for larger loans, statements prepared by an accountant have generally been needed for the past two years, while tax returns may be enough for smaller loans.
Interim statements: a year-to-date balance sheet and income statement, often prepared internally, so the lender can see how the current year is going.
Accounts receivable and payable aging: to check whether customers pay you on time and whether you pay suppliers on time.
T2 notices of assessment: proof the corporate returns are filed and assessed with no balance owing.
Personal net worth statement and personal guarantee: lenders commonly ask owners of small corporations to guarantee the loan personally, so they look at your personal assets and debts too.
Business plan and projections: for term loans and new ventures. BDC says banks typically want a monthly cash flow forecast for the rest of the current year and the following year.
Bank statements: recent business bank statements, so the lender can see actual cash movement.

Compiled or Reviewed Financial Statements for a Loan

For most small business loans, compiled year-end statements are enough. Once borrowing passes a level set by the lender’s own credit policy, the loan agreement may require reviewed statements every year. That adds cost every year for the life of the loan, so read the covenant before you sign. Our comparison of a compilation vs review engagement explains the difference in work and assurance.

Whichever level you provide, the lender will compare years, so consistency matters. A change of accountant, year end or accounting basis between years makes the trend harder to read and invites questions.

Financial Ratios Lenders Calculate From Your Statements

Lenders run the same handful of ratios on most applications:

Debt service coverage ratio (DSCR): EBITDA divided by the principal and interest due in the year, as set out in BDC’s definition of the debt service coverage ratio. At 1.0, every dollar of cash flow goes to debt payments and nothing is left for a slow month. Each lender sets its own minimum, and some deduct taxes or shareholder withdrawals from EBITDA first.
Current ratio: current assets divided by current liabilities, which shows whether the business can pay what is due in the next 12 months.
Debt to equity: total liabilities divided by shareholders’ equity, which shows how much of the business is funded by creditors rather than owners.
Gross margin trend: gross profit divided by revenue, compared over three years. A falling margin often worries a lender more than one flat year of sales.

Here is a worked example for a fictional distribution company applying for a $200,000 term loan:

Item	Amount
Revenue	$1,850,000
Gross profit (30.0% margin)	$555,000
Net income before tax	$96,000
Add back interest	$14,000
Add back amortization	$38,000
EBITDA	$148,000
Principal and interest on existing debt	$62,000
Principal and interest on the new $200,000 loan	$46,000
Total annual debt service	$108,000
Debt service coverage ratio ($148,000 ÷ $108,000)	1.37
Current ratio ($410,000 ÷ $260,000)	1.58
Debt to equity ($520,000 ÷ $340,000)	1.53

A DSCR of 1.37 after the new loan means cash flow covers the payments with some room. The question the lender will ask first is the gross margin, which fell from 32.4% two years ago to 31.5% last year and 30.0% this year. Have the answer ready, such as a supplier price increase you have since passed on to customers. Our guide on how to read a balance sheet walks through the current ratio and debt to equity in more detail.

Canada Small Business Financing Program and BDC Loans

Newer businesses without much history or collateral should ask their bank about the Canada Small Business Financing Program (CSBFP). You apply through your own bank or credit union, which approves the loan, and the federal government shares the risk with the lender. According to Innovation, Science and Economic Development Canada:

Eligibility: small businesses and start-ups operating in Canada with gross annual revenue of $10 million or less. Farming businesses are not eligible.
Maximum: $1.15 million per borrower, made up of term loans up to $1,000,000 and lines of credit up to $150,000.
Term loan limits: no more than $500,000 for leasehold improvements and equipment, and no more than $150,000 for intangible assets and working capital. Commercial land and buildings fall under the $1,000,000 term loan limit.
Costs: a 2% registration fee on term loans, with interest capped at the lender’s prime rate plus 3% for floating-rate term loans and prime plus 5% for lines of credit.

The Business Development Bank of Canada (BDC) is a federal Crown corporation that lends directly to Canadian businesses, with loans from $10,000 up to several million dollars. It says requests under $100,000 need fewer documents. It is worth a conversation when your bank wants more security than you can offer.

What to Fix in Your Books Before Applying for a Loan

Reconciled books: every bank, credit card and loan account reconciled to its statement through the most recent month end.
Shareholder loan balances cleared or explained: a large amount owing from you to the company looks like cash leaving the business. A large amount owing to you may need a postponement agreement. Our guide to bookkeeping basics explains how these accounts work.
HST filed and paid: lenders check for CRA arrears, and a balance owing raises immediate questions about cash flow.
Personal expenses out of the books: family phones, personal meals and vehicles run through the company reduce reported profit and make the statements less credible. Lenders are reluctant to add them back on your word alone.
Consistent year ends: changing your year end or switching between cash and accrual reporting makes year-over-year comparisons unreliable.

A Loan-Ready Timeline and How a Fractional CFO Helps

Start well before you need the money:

Six to twelve months out: move to monthly reconciliations and monthly statements, clean up the shareholder account and catch up any late filings.
Three months out: make sure the latest year-end statements and T2 are complete and assessed, then prepare interim statements and draft projections.
One month out: assemble the package, write a one-page summary of what the loan is for and how it will be repaid, and prepare answers for anything unusual in the numbers.

Projections are where many applications fall short. A fractional CFO can build a monthly cash flow forecast with and without the loan, test it against a slower sales scenario and explain the assumptions to the banker. That turns the forecast from a spreadsheet into a repayment plan the lender can follow.

This is general information as of October 2026, not advice for your situation.

Written by Targeted Accounting

CPA-led bookkeeping, payroll and outsourced CFO for Canadian businesses, with 10+ years of running and cleaning up small business books.

Getting Your Financial Statements Ready for a Lender?

Targeted Accounting cleans up books, prepares compilation financial statements and builds the projections lenders ask for. Our CPA-led practice brings 10+ years of experience with Canadian owner-managed businesses. See our outsourced CFO services or get in touch.

How to Read a Balance Sheet, With a Small Business Balance Sheet Example

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How to Read a Balance Sheet, With a Small Business Balance Sheet Example

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How to Read a Balance Sheet

A balance sheet is a snapshot of your business on one day: what it owns, what it owes and what is left for the owners. Most owners read the income statement first because profit is easy to follow. The balance sheet is where problems show up early, such as a tax balance that keeps growing, money the owner took out that the CRA can treat as income, or a cash figure that no longer matches the bank.

This guide walks through a sample balance sheet for a small Canadian corporation line by line, then covers the ratios a lender calculates and the red flags we check when we take on a new client. It is part of our series on monthly financial statements and year-end reporting. If some of the terms are new, our guide to bookkeeping basics is a good place to start.

The Balance Sheet Equation: Assets, Liabilities and Equity

Every balance sheet follows one equation: assets = liabilities + equity. The left side lists what the business owns or is owed. The right side shows who has a claim on those assets: lenders, suppliers and the government first, then the owners. If the two sides do not agree, the books are wrong.

Both sides are split by timing:

Current assets: cash and anything expected to turn into cash within 12 months, such as accounts receivable, inventory and prepaid expenses.
Long-term assets: things the business uses for more than a year, such as equipment, vehicles, computers and leasehold improvements.
Current liabilities: amounts due within 12 months, including supplier bills, HST owing, payroll remittances, corporate tax and the next 12 months of loan principal.
Long-term liabilities: debt due after 12 months, such as the rest of a term loan.
Equity: what the owners paid for their shares, plus profits kept in the company.

The split matters because current assets pay current liabilities. A profitable company can still run short of cash when most of its money is tied up in equipment and its bills are due next month.

Balance Sheet Example for a Small Canadian Corporation

Here is a simplified balance sheet for a fictional Ontario renovation company, Northfield Renovations Inc., at its December 31, 2025 year end.

Northfield Renovations Inc., December 31, 2025	$
Current assets
Cash	48,200
Accounts receivable	36,500
Inventory	12,300
Prepaid expenses	3,000
Total current assets	100,000
Equipment and vehicles, at cost	85,000
Less accumulated amortization	(32,000)
Total assets	153,000
Current liabilities
Accounts payable and accrued liabilities	18,400
HST payable	7,600
Deferred revenue (customer deposits)	9,000
Corporate income tax payable	5,000
Current portion of term loan	10,000
Due to shareholder	15,000
Total current liabilities	65,000
Term loan, less current portion	30,000
Total liabilities	95,000
Share capital	100
Retained earnings	57,900
Total equity	58,000
Total liabilities and equity	153,000

Total assets of $153,000 equal total liabilities of $95,000 plus equity of $58,000. That check is the first thing to look at on any balance sheet.

Balance Sheet Lines That Confuse Business Owners

Most lines above explain themselves. These are the ones clients ask about most:

Due to shareholder: money the owner put into the company, or business costs the owner paid personally, that the company has not yet repaid. Northfield owes its owner $15,000 and can repay it without tax. Because the owner can ask for it back at any time, it usually sits in current liabilities.
Due from shareholder: the reverse, where the owner has taken out more than they put in. This debit balance is the one that causes tax problems, covered in the red flags below.
HST payable: HST charged to customers minus input tax credits on purchases, for periods not yet paid. It is not your money, and it should match what your filed returns say you owe plus the current period.
Deferred revenue: deposits for work not yet done. Northfield’s $9,000 is deposits on January jobs. It becomes revenue when the work is done, so until then it is a liability.
Accumulated amortization: the wear on equipment recorded so far. Northfield’s equipment cost $85,000 and $32,000 has been expensed, leaving a net book value of $53,000. That is an accounting estimate, not a resale value, and it usually differs from the capital cost allowance claimed on the tax return.
Retained earnings: all profits since the company started, minus all dividends paid. This is the line that ties the balance sheet to the income statement.

Northfield’s retained earnings reconcile like this: opening balance of $42,400, plus 2025 net income of $25,500, minus dividends of $10,000, equals the closing balance of $57,900. Your accountant should be able to walk you through the same calculation for your company.

Balance Sheet Ratios Lenders Calculate

A banker reading your balance sheet will work out a few ratios within minutes. Using Northfield’s numbers:

Working capital and current ratio: current assets minus current liabilities gives working capital of $35,000. Current assets divided by current liabilities gives a current ratio of 1.54 ($100,000 ÷ $65,000). BDC’s definition of the current ratio notes that most businesses aim to keep it between 1.70 and 2.0.
Debt to equity: total liabilities divided by total equity. Northfield’s is 1.64 ($95,000 ÷ $58,000). Lenders compare it with other businesses in the same sector, as BDC explains in its debt-to-equity glossary entry, and a ratio that rises every year tells them the company is growing on borrowed money rather than profit.
Quick ratio: current assets less inventory and prepaid expenses, divided by current liabilities. Northfield’s is about 1.30 ($84,700 ÷ $65,000). It tests whether the business could pay its short-term bills without selling inventory.

Northfield’s current ratio sits below the BDC range mainly because of the $15,000 owed to the owner. A lender in that position may ask the owner to sign a postponement agreement, promising to leave the money in the company while the loan is outstanding. Our guide to financial statements for a business loan covers the cash flow ratios lenders add to these.

If you need projections and lender-ready reporting rather than just clean books, see our outsourced CFO services.

Balance Sheet Red Flags to Watch For

When we take over a set of books, these are the balance sheet items we check first:

Negative equity: total liabilities larger than total assets. Past losses or withdrawals have used up everything the owners put in, and the company often depends on the owner’s money to keep going. Lenders treat it as a serious warning.
Growing suspense or uncategorized balances: an “Ask my accountant” or uncategorized expense account that is never cleared means transactions are being posted without anyone understanding them. A few hundred dollars at month end is normal. Thousands carried for months is not.
A bank balance that does not match the statement: the cash line should equal the bank statement on the same date, adjusted for outstanding cheques and deposits. If it does not, the reconciliation has not been done and every other number is suspect.
A debit balance owing from the shareholder: under the CRA’s shareholder loan rules in Income Tax Folio S3-F1-C1, a loan from the company to its shareholder is generally included in the shareholder’s income unless it is repaid within one year after the end of the company’s tax year in which it was made, and the repayment is not part of a series of loans and repayments. Our guide to shareholder loan planning explains the usual fixes.
HST payable that does not match filed returns: if the balance sheet shows $7,600 owing but your CRA account shows $12,000, either a return or the books are wrong. Both need to be fixed before year end.

How Often to Review Your Balance Sheet and What to Ask Your Bookkeeper

Read it every month, once the bank accounts are reconciled. A balance sheet you only see at year end gives you 12 months of problems to fix at once. Compare each month with the month before and with the same month last year, and look for lines that moved more than you expected.

Each month, ask your bookkeeper for:

Reconciliations: confirmation that every bank, credit card and loan account is reconciled to the month-end statement.
Receivables: the aged receivables list, with any customer over 60 days flagged.
Tax balances: HST, payroll remittances and corporate tax owing, checked against your CRA accounts.
Shareholder account: the balance and what changed it this month.
Suspense items: a list of anything uncategorized, with a date to clear it.

At year end, your accountant uses the same balance sheet to prepare your annual financial statements. The level of statements you need depends on who will read them, which we explain in our comparison of a compilation vs review engagement.

This is general information as of October 2026, not advice for your situation.

Written by Targeted Accounting

CPA-led bookkeeping, payroll and outsourced CFO for Canadian businesses, with 10+ years of running and cleaning up small business books.

Want Monthly Financial Statements You Can Actually Read?

Targeted Accounting prepares monthly financial statements for owner-managed Canadian businesses and walks owners through them line by line. Our CPA-led practice has 10+ years of experience. See our financial reporting services or get in touch.

Personal Services Business (PSB) in Canada: CRA Rules, Tax Rate and How to Avoid PSB Status

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Personal Services Business (PSB) in Canada: CRA Rules, Tax Rate and How to Avoid PSB Status

Targeted Accounting

What Is a Personal Services Business?

Incorporating is popular with consultants, IT contractors and other professionals who work for a small number of clients. The low small business tax rate is attractive. But if, without the corporation, you would really be the client’s employee, the CRA can treat the company as a personal services business (PSB), and the tax result is far worse than if you had never incorporated.

This guide explains what a PSB is, how the CRA decides, what it costs and how to reduce the risk. It is part of our guide to bookkeeping for consultants and professional services.

What Makes a Corporation a PSB

The rule targets an “incorporated employee”. A corporation is carrying on a personal services business when it provides services to a client through an individual who owns 10% or more of the corporation (directly or with related people), and that individual would reasonably be regarded as the client’s employee if the corporation were not there.

The CRA uses the same factors it uses to decide employee versus contractor:

Control: does the client decide how, when and where the work is done?
Tools and equipment: who provides the laptop, software, office and phone?
Chance of profit, risk of loss: is your income fixed hourly with no real business risk?
Integration: do you work like staff, with a company email, a seat in team meetings and no other clients?

A long-term contract with one client, set hours, the client’s equipment and supervision by the client’s managers looks very much like employment, regardless of what the contract says.

What a PSB Designation Costs

A PSB does not get the small business deduction or the general corporate rate reduction, and pays an extra 5% federal tax. The federal rate on PSB income is 33%, and with Ontario’s 11.5% general rate the combined rate is about 44.5%, compared with about 11.2% for an active small business. Dividends paid out later are then taxed again personally.

Deductions are also restricted. A PSB can generally deduct only the salary, wages and benefits paid to the incorporated employee, costs of negotiating contracts, and legal costs of collecting amounts owed. Rent, software, travel and other normal business expenses are largely disallowed.

The result is often more tax than if the person had been an employee. And PSB reassessments usually reach back several years, with interest.

PSB Tax Rate by Province

PSB income is taxed at the full federal rate of 28% plus the additional 5% PSB tax, so 33% federally, with no small business deduction and no general rate reduction. The province then adds its general corporate rate. Approximate combined rates:

Province	Provincial general rate	Combined PSB rate
Alberta	8%	41%
Ontario	11.5%	44.5%
Quebec	11.5%	44.5%
British Columbia	12%	45%
Manitoba	12%	45%
Saskatchewan	12%	45%
Nova Scotia	14%	47%
New Brunswick	14%	47%
Newfoundland and Labrador	15%	48%
Prince Edward Island	16%	49%

Compare that with roughly 11% to 13% on the first $500,000 of active business income for a small business in most provinces. Provincial rates change; confirm the current year’s rate before relying on these figures.

Exceptions to the PSB Rules

A corporation is not a PSB if:

it employs more than five full-time employees throughout the year in the business; or
the services are provided to an associated corporation.

Most one-person consulting corporations cannot use either exception, so for them the question comes down to whether the working relationship really is independent.

How to Avoid Personal Services Business Status

There is no form that makes you safe, but the facts can be made stronger:

Work for more than one client, or at least market your services and be able to show it.
Use a written contract that reflects independence: deliverables or project fees rather than open-ended hours, your right to set your own methods and schedule, and the right to subcontract.
Provide your own equipment, software and workspace, and carry your own insurance.
Bear real business risk: fixed-price work, your own costs, invoices that look like a business’s invoices.
Avoid the trappings of employment: client email addresses, staff ID, performance reviews, vacation approvals.

Paying yourself mostly through salary also limits the damage, because salary remains deductible even if the corporation is later found to be a PSB. Our guide to tax planning for owner-managers and the salary vs dividend calculator help you set the mix.

When PSB Risk Is Highest

Reassessments often follow a predictable path: a contractor works exclusively for one client through an agency for years, the engagement ends, and either the worker claims EI or the CRA reviews the client. IT contractors, project managers and former employees who return as consultants are frequent targets.

If your situation looks like employment, it is better to know before filing. The corporation’s year-end planning, covered in our T2 corporate tax guide, is the right moment to review it.

Personal Services Business FAQ

What is a personal services business under the CRA rules?
A corporation that provides services through a person who owns 10% or more of it and who would reasonably be considered the client’s employee if the corporation did not exist, unless the corporation has more than five full-time employees or serves an associated corporation.

What is the PSB tax rate in Canada?
33% federally (28% plus the 5% PSB surtax) plus the provincial general rate, about 44.5% in Ontario, with most expenses other than salary disallowed.

How do I avoid personal services business status?
Work for more than one client, contract for deliverables rather than hours, supply your own equipment and workspace, carry real business risk, avoid the trappings of employment, and pay yourself mainly by salary so the deduction survives a reassessment.

Can the CRA reassess past years as a PSB?
Yes. PSB reassessments commonly reach back several years with interest, often triggered when a long single-client contract ends or the worker claims EI.

Written by Targeted Accounting

CPA-led bookkeeping, payroll and outsourced CFO for Canadian businesses, with 10+ years of running and cleaning up small business books.

Not Sure Whether Your Corporation Is at Risk?

We review consultants’ contracts and working arrangements, set up salary and dividend plans, and prepare the corporate return. See our corporate tax services or get in touch.

Rental Property Expenses in Canada: What You Can Deduct on Form T776

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Rental Property Expenses in Canada: What You Can Deduct on Form T776

Targeted Accounting

Rental Property Expenses: Every Dollar Counts

Rental properties rarely throw off much cash once the mortgage is paid, so the tax deductions matter. Claim too little and you overpay every year. Claim the wrong things, such as an improvement as a repair or your own labour, and a CRA review can take back several years of deductions with interest.

Rental income and expenses are reported on Form T776, and the CRA’s Rental Income guide (T4036) sets out the rules. This guide translates them into a practical checklist. It is part of our guide to bookkeeping for real estate agents and investors in Canada.

Rental Expenses You Can Deduct on Form T776

These are the common current expenses on the T776:

Expense	Notes
Mortgage and loan interest	Interest only, on money borrowed to buy or improve the rental. Principal is not deductible.
Property taxes	For the period the property was available for rent.
Insurance	The current year’s premium. Prepaid future years are deducted in those years.
Repairs and maintenance	Labour and materials to restore the property, not improve it.
Utilities	Only if you, not the tenant, pay them.
Condo fees	Your share of common-property costs.
Management and professional fees	Property managers, legal fees for leases and collecting rent, accounting.
Advertising	Listings and finder’s fees for tenants.
Wages	Paid to a superintendent or maintenance staff, not to yourself.
Motor vehicle	Limited: with one property, only when you do repairs yourself and carry tools or materials.

Repairs vs Improvements on a Rental Property

This is where most landlords get into trouble. A current expense keeps the property in the condition it was in. A capital expense gives a lasting benefit or improves it beyond its original condition.

Repainting, fixing a leaking roof, replacing a broken window pane: current.
A new addition, upgrading wooden steps to concrete, a full renovation before renting: capital.
Replacing a whole roof or a furnace: it depends. A like-for-like replacement that only restores the property can be current, while an upgrade or a part that extends the building’s life is usually capital. Get advice before claiming large items.

Keep invoices that describe the work clearly. “Repairs, $18,000” invites questions; “replace damaged drywall and repaint unit 2 after tenant move-out” usually does not.

Capital Cost Allowance on a Rental Building

You cannot deduct the cost of the building in the year you buy it. Instead you claim capital cost allowance (CCA) each year. Most residential buildings fall into Class 1 at 4% a year on a declining balance, and a separate class is generally required for each rental building that cost $50,000 or more.

When you buy, split the price between land and building, because land is never depreciable. Property tax assessments are a common basis for the split.

Three rules to remember:

CCA cannot create or increase a rental loss. You can only claim it against net rental income.
CCA is optional. Many owners claim less in low-income years, because CCA claimed is recaptured as income when you sell for more than the remaining undepreciated cost.
In the year you buy, the half-year rule usually applies, although accelerated investment incentive rules can change the first-year amount.

Renting Part of Your Home and Other Special Cases

If you rent a basement suite or a room, you can deduct the share of expenses that relates to the rented area, usually based on square footage or number of rooms. You cannot claim the personal share, and you generally should not claim CCA on the part of your home you live in, because it can affect the principal residence exemption.

A few other rules to know:

Vacant land: interest and property taxes are limited to the rental income from the land and cannot create a loss.
Short-term rentals: expenses for short-term rentals that do not comply with provincial or municipal licensing or zoning rules are no longer deductible for the non-compliant period.
Co-owned properties: income and expenses are split by ownership share, and each owner reports their share on their own T776.

Rental Property Records That Hold Up in a CRA Review

Keep a separate bank account for each rental property, or at least for your rentals as a group, and keep receipts, leases and mortgage statements for six years. A simple ledger or bookkeeping file per property makes the T776 a matter of copying totals rather than reconstructing a year.

The rental schedule is filed with your personal return, due 30 April. Our tax filing calendar covers the deadlines, and our bookkeeping services can keep each property’s books for you.

Written by Targeted Accounting

CPA-led bookkeeping, payroll and outsourced CFO for Canadian businesses, with 10+ years of running and cleaning up small business books.

Want Your Rental Books and T776 Done Right?

We keep property-level books for landlords and investors, separate repairs from improvements, track CCA by property and prepare the rental schedules at tax time. Get in touch to talk about your portfolio.