6 Canadian tax & accounting terms starting with I
Plain-language definitions, each with the CRA rule it comes from and the filings it affects.
Income Statement
An income statement, or profit and loss statement, reports a business's revenue and expenses over a period, ending in net profit or loss.
In practice: A company reports $500,000 revenue, $300,000 cost of goods sold, $150,000 operating expenses and $10,000 tax. Its income statement shows $40,000 net income for the year.
Incorporation
Incorporation is the legal process of forming a corporation, a separate legal entity from its owners, giving limited liability and access to corporate tax rates.
In practice: A consultant earning far more than she spends incorporates. Surplus profit is now taxed at roughly 12% inside the company instead of up to 53% personally, and it can be retained and invested until she draws it in a lower-income year.
Input Tax Credit (ITC)
An input tax credit is the GST/HST a registered business pays on its purchases, which it claims back so that it only remits tax on the value it adds.
In practice: You buy a $2,000 laptop plus $260 HST for your business. You claim the $260 as an input tax credit on your HST return, reducing what you owe the CRA dollar for dollar, so the laptop effectively costs you $2,000.
Instalment
A tax instalment is a periodic prepayment of income tax made through the year, required when you owe more than a set threshold, rather than paying the whole amount at filing.
In practice: Your corporation owed $12,000 last year. Rather than paying it all at filing, the CRA expects roughly $1,000 monthly instalments through the year, with any balance settled two or three months after year-end.
Inventory
Inventory is the goods a business holds for sale, or the materials it will turn into products, recorded as a current asset until sold.
In practice: A store's $50,000 of unsold goods sits as inventory (a current asset). When sold, that cost becomes COGS. If $5,000 becomes obsolete, it is written down, reducing both the asset and taxable income.
Invoice
An invoice is a document a seller issues to a buyer requesting payment for goods or services, listing amounts, terms, and any GST/HST charged.
In practice: A consultant issues an invoice for $2,000 plus $260 HST, due in 30 days. The invoice date determines when the $2,000 is recognised as revenue and when the $260 HST must be remitted, regardless of when the client pays.
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