Reviewing Common T2 Schedules

How To Review Your Corporate Tax Return Before Signing

Published July 3, 2024 | Updated July 17, 2026

WHAT'S IN THIS ARTICLE
Order to Review | Part I Tax Payable Calculation (includes example) | T2Sch1 | T2Sch2 | T2Sch3 | T2Sch4 | T2Sch6 | Difference Between ACL and ABIL | T2Sch7 | T2Sch8 | T2Sch11 | Free Tax Textbook | Acronyms Used

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Small Business Common T2 Schedules

The Federal Court of Appeal recently upheld the taxpayer was responsible for the underreporting of income reported to CRA even though an accountant prepared the returns. Jamie Golombek's September 26, 2024 Financial Post article reported "the tax court determined it was not sufficient to simply rely on the accountant without asking any questions. “(The taxpayer) cannot simply throw his hands up and say that he blindly relied on his accountant, without making any attempt at seeking a better understanding of his obligations and without making any effort to verify the accuracy of the income reported in his income tax returns,” the judge said."

That's why, for this article, I've compiled a list of common T2 schedules that may be applicable to an average small business in Canada. I'll show you how to review your T2 return which involves understanding the various schedules required to correctly calculate your income tax payable. Because it's complex, I'll also show you how Part I federal tax payable is calculated. Let's learn how your corporation is taxed.

In What Order Do You Review Your T2 Schedules?

Preparing a T2 corporate income tax return can be complex, especially for a Canadian-Controlled Private Corporation (CCPC) with multiple income types and connections with other companies. That's why it's in your best interest to have your accountant prepare this return for you. 

That said, it's always good to know how to review the T2 once prepared. It will give you a better idea of how your business is taxed.

Before your accountant can prepare your return, you need to collect information to take to your accountant.

• Ensure all year-end adjustments are made, including depreciation, inventory adjustments, and expense accruals. Check your engagement letter, as your accountant may do this for you.
• Collect all financial statements and relevant documentation, such as the income statement, balance sheet, statement of cash flow, and statement of retained earnings. Don't forget to include your Aged A/R and A/P summaries.
• Ensure you provide all support documents for owner-manager compensation, including payroll records and T4 slips for salary, and dividend resolutions, payment records, and any T5 slips prepared for taxable dividends. If you can't find your T slips issued, sign into your CRA My Business Account and download the information from there. It should all be online by the end of March.

Here’s a systematic step-by-step approach to help a small business person review their accountant prepared T2 return. Let's take a look at the most common T2 Schedules you'll find in your T2 return before you sign.

1. Look at Schedule 100 (Balance Sheet Information): The information on this schedule should match your company's balance sheet.

2. Look at Schedule 125 (Income Statement Information): The information on this schedule should match your company's income statement.

3. Did you dispose of any capital property in the year that attracted a capital gain or loss?:

Check Schedule 6 (Summary of Dispositions of Capital Property) to see that any capital gains and losses from the disposition of capital property have been reported and the information  is what you were expecting.

More >> Schedule 6

4. What's happening on Schedule 8 (Capital Cost Allowance):

• This schedule calculates the Capital Cost Allowance (CCA) for depreciable property.
• Check to ensure all your capital assets and dispositions were captured by the accountant. Did the accountant claim or not claim CCA this year?

More >> Learn about CCA and why your accountant may not want to make a full CCA claim on your tax return every year.

5. Schedule 3 (Dividends Received, Taxable Dividends Paid, and Part IV Tax) is where you report any dividends paid or received:

• Check the details on dividends received and paid, including eligible, ineligible, and capital dividends reported. Is it what you were expecting?
• This schedule calculates Part IV tax on dividends received from connected corporations.

More >> Schedule 3

6. How was Taxable Income calculated?:

• Net Income for tax purposes is calculated on Schedule 1. This schedule reconciles the net income (loss) for accounting purposes with the net income (loss) for tax purposes. 
• The tax program will have calculated Schedule 1 using information from Schedules 100 and 125. 
• You should notice that the accounting net income was adjusted by adding or subtracting items that were not taxable or not deductible.

More >> Schedule 1

7. Do you have passive income?:

•  Schedule 7 divides your corporate income into taxable "buckets" so that the tax payable can be calculated correctly. It is commonly used to determine income eligible for the small business deduction (SBD) and, where applicable, to calculate aggregate investment income (AII - passive income) and related refundable tax.
• If you don't have passive income (aggregate investment income - AII), then this schedule still needs to be completed to determine your eligibility for the SBD.
• Check to see if the aggregate investment income from your investments such as interest, dividends, and capital gains is what you expected it to be.
• Check the SBD (small business deduction) calculations. Is the ABI (active business income) what you were expecting? If you only have passive income, the SBD calculation should be zero.

More >> Schedule 7

8. Review Schedule 50 (Shareholder Information): Verify the details of shareholders are reported correctly; particularly the owner/manager who may be an employee as well as a shareholder .

9. Review Schedule 23 (Agreement Among Associated Corporations to Allocate the Business Limit):

• You will usually see Schedule 23 if your corporation is associated with one or more other corporations for income tax purposes.
• This schedule shows how the SBD business limit is being shared among the associated corporations.
• Review it to make sure your corporation’s allocated share of the business limit matches what you were told and what you expected.
• If you have a Schedule 23, your corporation is likely associated with one or more other corporations for tax purposes. In that case, you may also see amounts elsewhere in the return for balances or transactions between the companies, such as loans, management fees, rent, interest, or dividends. These amounts, referred to as inter-company transactions, may appear on the balance sheet (S100), income statement (S125), dividend schedules (S3), or in your tax preparer's supporting working papers. You do not need to understand every detail, but you should ask your accountant to explain any amounts between related companies so you can confirm they look complete, reasonable, and what you were expecting.

10. Other Schedules as Required: Depending on the specifics of the corporation, other schedules may be required. For example, Schedule 31 is used to claim Investment Tax Credits, Schedule 5 calculates provincial and territorial corporate tax payable), and Schedule 38 tracks your corporation's Refundable Dividend Tax On Hand (RDTOH) balances.

• Since 2019, RDTOH has been divided into two separate accounts: Eligible RDTOH (ERDTOH) and Non-Eligible RDTOH (NERDTOH). In most cases, refundable Part I tax arising from AII is added to NERDTOH, while ERDTOH generally relates to refundable tax associated with eligible portfolio dividends received from other corporations. Throughout this article, I refer simply to RDTOH unless the distinction between ERDTOH and NERDTOH is relevant.

11. Sign Return: Once you have reviewed the return for accuracy and completeness, sign the return so your accountant can e-file it on your behalf.

Common T2 Schedules Used by Small Business Owners

JUMP TO >> T2Sch1 | T2Sch2 | T2Sch3 | T2Sch4 | T2Sch6 | T2Sch7 | T2Sch11

Now that we have a roadmap for the order in which to review the T2 return, let’s look at the individual schedules in more detail.

Remember, the schedule numbers do not always tell the story of how the calculations flow. Understanding the role each schedule plays ... and how the schedules work together ... will make reviewing a T2 return much easier.

Common T2 Schedules

Schedule 2 - Charitable Donations and Gifts

Schedule 2, also known as the "Charitable Donations and Gifts" schedule, is a common T2 schedule for small businesses in Canada that make charitable donations. Its primary purpose is to keep track of all the donations and gifts your corporation made during the tax year. It calculates the total amount you are eligible to claim as a tax deduction to lower your taxable income.

Schedule 2 helps keep things clear and straightforward when it comes to donations by making sure corporations provide detailed tracking. This ensures everything stays transparent and follows Canadian tax rules regarding charitable contributions. While you do not submit your official receipts with your electronic tax return, you must keep them in your records in case the CRA requests them later.

Here’s an overview of  Schedule 2:

• Corporations that make charitable donations or gifts must detail these on Schedule 2. Entries include gifts to registered charities, Canadian amateur athletic associations, registered Canadian municipalities, and certain other qualified donees.
• The schedule calculates the allowable deduction for the year. For most corporations, the maximum deduction is limited to 75% of the corporation’s net income for tax purposes, though this limit can be higher when donating certain capital property.
• If the corporation’s total donations exceed the maximum allowable amount for the current tax year, the excess amount can often be carried forward for up to five years. Part 6 of the Schedule 2 tracks these carry forward amounts for you so you can apply them to future tax returns.
• The schedule calculates the federal tax deduction for charitable donations (under Division C of the ITA).

Common T2 Schedules

Schedule 4 - Corporation Loss Continuity and Application

Schedule 4 is another common T2 schedule. It is titled "Corporation Loss Continuity and Application." Its primary purpose is to help corporations track available losses from current and previous years; and shows how those losses are being applied, carried back, or carried forward as permitted by tax legislation, thus optimizing the corporation's tax position.

Corporations use Schedule 4 to track different types of losses, such as non-capital losses, net capital losses, and restricted farm losses, among others. This historical tracking is necessary for determining the amounts available for carryforward or carryback. 

This common T2 schedule is a tool for corporations to manage their losses effectively. It allows for accurate tracking, proper application of various types of tax losses, and ensures compliance with Canadian tax regulations. This can lead to significant tax savings and better financial planning for the corporation.

The CRA uses Schedule 4 to verify that losses claimed by a corporation are available, properly calculated, and applied according to the tax rules.

Here’s a detailed look at the various loss components of Schedule 4:

• Non-Capital Losses: Can include business losses (losses from operating a business), certain property losses (like rental losses), and allowable business investment losses (ABIL). Non-capital losses can generally be carried back three years or carried forward for future years to reduce taxable income, subject to the applicable rules and expiry periods.
• Net Capital Losses: Pertains to capital transactions such as the sale of investments or property (other than inventory). These losses can only be applied against capital gains (not regular business income) and can be carried back three years or forward indefinitely.
• Restricted Farm Losses and Other Specified Losses: These are specific losses that have different rules and limitations for carry forward and carry back and must be tracked according to the applicable provisions.

Application of Losses

• Schedule 4 is used to record how the corporation is applying these losses against income in the current tax year or carrying them back to a previous year. This application can reduce taxable income, thereby lowering the corporation’s tax liability.
• Corporations generally have some flexibility in deciding who to use available losses, allowing your accountant to plan the timing of the deductions based on your tax position. Accountants will often use a corporation's older losses first to avoid losing them due to expiry, but the best approach depends on your corporation's tax situation and future plans.

Use Schedule 4 for Tax Planning

Schedule 4 allows corporations to plan their tax strategies better, reducing tax liability over multiple years. By optimizing the timing and method of applying losses, corporations can improve their financial stability and cash flow management. In simpler terms, by timing when losses are used, your corporation can manage your tax payments and avoid losing valuable deductions. This is where having a good relationship with your accountant pays off.

Difference Between ACL and ABIL

Allowable Capital Loss (ACL)

An ACL represents the allowable portion (currently 50%) of the capital loss incurred on the sale of capital property, such as shares in a publicly traded company, land, or buildings.

ACLs can be used to offset taxable capital gains (TCG) but cannot be deducted against other types of income. Unused ACL can be carried back for three years or carried forward indefinitely to apply against future capital gains.

ACL Example -  A corporation sells shares of a publicly traded company for a loss. Assume a capital loss of $10,000 x 50% inclusion tax rate = $5,000 ACL

The $5,000 ACL can offset TCG but not other types of income.

Allowable Business Investment Loss (ABIL)

An ABIL is a special type of capital loss arising from a disposition of certain types of properties, such as shares* or debts of a small business corporation. *This happens if you sell your incorporated business (i.e. the shares) as opposed to selling the assets of the business for a loss creating a business investment loss (BIL).

ABIL can be deducted against any type of income, not just capital gains. This makes ABIL more flexible and beneficial compared to ACL.

Like ACL, ABIL can be carried back three years. However, it can only be carried forward for a limited period (currently up to ten years). After ten years, any remaining unused ABIL converts into a net capital loss that can be carried forward indefinitely but can only be applied against capital gains.

ABIL Example -  A corporation writes off an uncollectible loan made to a small business corporation. They have documented their attempts at collection to prove it is an uncollectible debt. Assume a business investment loss (BIL) of $10,000 x 50% inclusion tax rate = $5,000 ABIL

The $5,000 ABIL can offset not just capital gains but any taxable income, such as business income or rental income.

Common T2 Schedules

Schedule 7 - Aggregate Investment Income and Income Eligible for the Small Business Deduction

The next common T2 schedule we will examine in this article is Schedule 7.  The primary purpose of Schedule 7 is to sort your corporation's taxable income into different tax buckets. The most common buckets are Active Business Income (ABI) and Aggregate Investment Income (AII). Once the income has been categorized, Schedule 7 determines how much ABI qualifies for the Small Business Deduction (SBD). This is important because different tax rates apply to different types of income.

This schedule is critical for corporations that earn income from investments, separate from their active business income (ABI). Understanding how Schedule 7 works is important for corporations to ensure compliance with tax regulations to claim the small business deduction (SBD) properly. 

More >> ABI Exclusions

Key Objectives of Schedule 7:

1. Determination of Active Business Income (ABI): ABI may qualify for the Small Business Deduction (SBD), which reduces the federal corporate tax rate on eligible active business income up to the corporation's available business limit. The maximum annual business limit is generally $500,000, but it may shared with associated corporations and reduced if your corporation (or its associated group) has high taxable capital or AAII.
2. Determination of Aggregate Investment Income (AII): AII is generally taxed at higher rates compared to ABI. It can include income such as taxable capital gains, interest, dividends received from non-connected corporations such as public companies, and rental income. It helps in calculation of refundable taxes, such as Refundable Dividend Tax on Hand (RDTOH).
3. Determination of ABI Available for Small Business Deduction (SBD)
4. Identifying any business limits that may reduce the amount eligible for the SBD.

Relationship with Schedule 1 (Reconciliation of Net Income for Tax Purposes):

Schedule 1 starts with accounting net income and adjusts it arrive at income for tax purposes. Schedule 7 then uses this information to determine how your corporation's income is categorized into different tax buckets for tax purposes, including ABI (active income) and AII (passive income).

Relationship with T2 Jacket:

The T2 Jacket is the main form for corporate income tax returns. It brings together the results from Schedule 1, Schedule 7, and other supporting schedules to calculate your corporation's taxable income and federal tax payable. Schedule 7 provides the amount of income eligible for the SBD and identifies AII, both of which affect the federal tax calculation.

To understand where Schedule 7 fits, follow the path of the income through the T2 return:

• Net Income/Loss: Starts with your corporation's accounting income from Schedule 1. It includes all income, including ABI and AII.
• Taxable Income: After adjustments and deductions on Schedule 1, the accounting net income translates to taxable income in the T2 jacket.
• Small Business Deduction (SBD): Schedule 7 calculates how much ABI qualifies for the lower business rate.
• Tax Payable Calculation: Schedule 7 then takes the relevant amounts from Schedule 1 taxable income and determines what type of taxable income it is such as the ABI eligible for the SBD, which affects the overall tax payable. These results flow to the T2 jacket, where the corporation's federal tax payable is calculated.

Specific Link to T2 Jacket:

• Line DD of Part 6 of Schedule 7 flows through to line 400 of the T2 jacket. Line 400 reflects income eligible for the SBD which would include ABI but exclude AII. 

How to Complete Schedule 7 Line-by-Line

I sometimes find this schedule difficult to calculate. The tax program I use does not automatically complete this schedule. It requires you to input some numbers to get the tax buckets right. You need to know the rules. I always worry that if you do something wrong here, your SBD calculation is affected.  So I'll assume others besides myself may have the same difficulty with this Schedule and do a complete walk through of it.

Let's use the Part I Tax Payable example at the start of this chat to complete a Schedule 7:

Step 1: Calculate ABI:

• Line 400 - ABI from all sources = $200,000
• Line 405 - Base Amount is the same as line 400 unless any adjustments are needed $200,000
• Line 410 - Specified Partnership Income - $0 in our example

Step 2: Determine income eligible for SBD:

• Line 425 - ABI Eligible for SBD - Enter the lower of Line 405 or the allocated SDB Limit. In our example our SBD was allocated $100,000 as there are two associated companies that share the SBD = Enter $100,000

Step 3: Determine AII:

• Line 430 - AII = $50,000 in our example

Step 4: Calculate effective business limit for SBD:

• Line 445 - Base amount for the business limit - enter the standard amount before any reductions = $500,000
• Line 450 - Income Prior to Dividends - Enter the taxable amount before applying the SBD = $250,000 [Total ABI + AII]
• Line 460 - AII reduction - If AII exceeds $50,000, there’s a reduction of the business limit. Here AII is exactly $50,000.
  - Reduction formula: (Adjusted AII - $50,000) / 5
  - Since Adjusted AII is exactly $50,000, no reduction is needed. Enter $0
• Line 465 - Gross reduction amount - Combine any reductions applicable (e.g., Line 460 and other potential reductions). Enter $0
• Line 470 - Net Business Limit (NBL) - Standard business limit from line 445 $500,000 minus Gross reduction amount from line 465 $0 = Enter $500,000

Step 5:  Summary

• Line 475 - Business Limit Allocated - Enter the allocated business limit (based on Part 4, Line 470) = $500,000
• Line 480 - Eligible Amount for SBD - Enter the lower of (Line 475) or (Line 425) = $100,000

Step 6: Review

• Optimal entries ensure the ABI eligible for the SBD deduction is properly identified and calculated. Confirm that the tax software aligns with the amounts entered to ensure no deduction errors occur.
• By filling in the above amounts accurately, Schedule 7 will correctly calculate the Small Business Deduction, ensuring the tax program determines the federal tax payable properly. 

Calculating the Refundable Portion of Part I Tax

Le't look at how to calculate the refundable portion of Part I tax.

• The actual calculation for the refundable portion of Part I tax and the RDTOH calculation is done on the T2 jacket.
• Schedule 7 helps identify investment income that may create refundable tax balances. I view it the portion of Part I tax that is refundable because of investment income. This is known as the refundable dividend tax on hand (RDTOH). 
• The RDTOH mechanism is designed to ensure that investment income within a corporation is not taxed more heavily than if it were earned by an individual directly. This is achieved by refunding a portion of the tax when the corporation pays dividends to its shareholders

1. Income Calculation: Report your different types of investment income on Schedule 7. This includes Canadian and foreign dividend income, interest income, rental income, and net taxable capital gains.
2. Non-Deductible Expenses: Deduct any non-deductible expenses related to earning the investment income to arrive at the net investment income.
3. Part I Tax Calculation: Determine the total amount of Part I tax related to the AII by applying the appropriate tax rates to the net investment income.
4. Refundable Portion: Calculate the refundable portion of the Part I tax, which is generally a percentage of the AII. For example, a standard rate is 30.67% (2016 to present) of AII up to a maximum threshold, representing the RDTOH account. I explained the derivation of 30.67% at the start of this chat.
5. Dividend Refunds: When the corporation pays taxable dividends, it can claim a dividend refund from the RDTOH account, thereby reducing the overall tax burden on investment income. The dividend refund is calculated as the lesser of the balance in the RDTOH account or a specified percentage of the taxable dividends paid.

Want to Learn More About Tax For Free?

While researching the material for this chat, I came across a free Intermediate Canadian Tax textbook created by undergraduate tax students at Kwantlen Polytechnic University (“KPU”) in British Columbia. It's awesome. 

I like it because it "teaches" by answering questions you probably have. Each question answered is concise, usually followed with examples. At the end of most articles, you'll find an interactive quiz on the material so you can see if you got the concept.

The textbook was created in the Spring of 2020 so beware that it will not be up-to-date on recent tax changes such as the 2022 introduction of Substantive CCPCs.

Check it out. They also have an introductory tax textbook! I wish I could have learned tax in a fun way such as this when I was taking courses.

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