I recently received from one of my clients a T4A for 2017. They based the amount in box 48 on the payments made in 2017 (i.e., payments covered invoices from Nov. & Dec. 2016 and Jan. to Oct. 2017). My business is set-up based on the accrual accounting method and now my revenue from this client doesn't match the T4A. How do I reconcile the difference between the T4A box 48 my actual income invoiced for this client on 2017 my tax return?
The requirements for a payor to report an amount in box 48 of a T4A are that you must report amounts that you "pay" for fees of other amounts for services. Therefore, a payor is not allowed to report amounts in box 48 on an "accrual" basis.
From an accounting perspective and to avoid CRA conflicts in the reporting of the box 48 amount transferred to a business statement, the solution is to make an "accrual adjustment" entry in either the income side of the business statement or the expense side of the business statement based on whether the accrual adjustment required is a net positive or a negative amount.
As an example, if the box 48 amount covered payments that were accruals from Nov 2016 to Oct 2017, and the Nov 2016 and Dec 2016 invoices (paid in 2017) amounted to $2,000.00 but the accruals from Nov 2017 to Dec 2017 were $3,000, then an entry on the income side of the business statement would be made to add $1,000.00 to the income reported ($3,000 to be reported in 2017 less $2,000 already reported in 2016.
However, if in the above example, if the accruals from the Nov 2016 and Dec 2016 invoices (paid in 2017) amounted to $3,000.00 but the accruals from Nov 2017 to Dec 2017 were $2,000, then an entry on the expense side of the business statement would be made to add $1,000.00 to the expenses reported ($2,000 to be reported in 2017 less $3,000 already reported in 2016.
Either entry on the business statement (T2125) would be entered as "accrual adjustment" and could be easily supported if audited. This would avoid any conflicts with changing the amounts shown in box 48 of the T4A and also not require asking the issuer of the T4A to make an amendment to the T4A that technically he is not allowed to make.
Often times the income reported on your T4A slip in Box 20 or Box 48 will differ from your actual Business or Self-Employed income. Here's a few options, I wish there was a better solution to this problem.
- If you have already reported this income in 2016, you may want to omit the T4A and enter your actual invoice amounts manually on the T2125 - Business Schedule, along with your expenses. CRA would likely contact you in regards to this "missing T4A", at which point you would need to provide an explanation and possibly your invoices to support the claim.
- Another option would be to "override" the amount in Box 48 to your figures, but again CRA would have different figures and may request supporting documents. You also would be ineligible for NetFile if you did this but could submit a letter explaining the reasoning behind the different amounts along with your paper filed return.
- And lastly, you could contact the payer/client and request an "amended T4A".
Thanks for the information. It is unfortunate that CRA or the tax software doesn't allow for an adjustment when completing the T2125 when the client issues the T4A based on using the cash accounting method and the consultant uses the accural accounting method when filing their tax return. I guess I will file by hard copy and attached an explanation for the differences.