Updated Checked by the Tax-Services.ca editorial team How we check
An income statement shows what your business earned and spent over a period, and ends on the profit or loss. If your year brought in $250,000 and cost $210,000 to run, the last line reads $40,000, and that’s the number most people mean when they ask how the business did.
It’s the statement owners actually read. The balance sheet is a photo, and this is the film of the year.
What should an income statement include?
The federal regulations for corporations list an income statement (the regulations accept other names for it) as one of the statements a corporation’s annual financials must contain. The accounting standard for private companies adds that revenue has to be shown separately on the face of the statement. Beyond that, the order is a matter of habit, and the habit looks like this. Wikipedia’s income statement page shows the same basic flow from revenue down to net income.
| Line | What it holds |
|---|---|
| Revenue | Sales for the period, after returns and discounts |
| Cost of goods sold | What the things you sold cost you directly |
| Gross profit | Revenue minus cost of goods sold |
| Operating expenses | Rent, wages, insurance, advertising, office costs, depreciation |
| Interest and other items | Loan interest, gains or losses outside normal sales |
| Profit before tax | What is left before income tax |
| Income tax | The tax on that profit |
| Net income | The bottom line |
How do you work out gross profit?
Take sales and subtract only the costs that moved with the goods: materials, inventory bought for resale, freight in, and labour if it went straight into the product. Rent and the owner’s car don’t belong here.
Say you sold $250,000 of goods that cost $150,000. Gross profit is $100,000. The profit margin calculator reads that as a 40% gross margin and a 66.7% markup, and the gap between those two trips people constantly. Margin is a share of the price. Markup is a share of the cost, so it’s always the bigger figure. A supplier who says “we mark up 40%” is selling at a far lower margin than one who says “we make 40%.”
What does a full income statement example look like?
Stay with that business. Operating expenses for the year come to $60,000, which leaves profit before tax of $40,000.
The corporate tax calculator gives a rough tax for an Ontario corporation on that profit: $4,678, with $35,322 left in the company. Treat it as an estimate. Ontario changed its small business rate partway through 2026, so the calculator uses a blended rate, and any passive income or shared small business limit would change the answer. The corporation’s actual return settles it.
So the statement ends like this: revenue $250,000, gross profit $100,000, profit before tax $40,000, net income about $35,300 on the estimate. Payroll is usually the biggest operating line, and the payroll remittance calculator shows what an employee costs beyond their gross pay, since the employer’s CPP and EI share sits on top.
Is the income statement the same as your tax return?
No, though it’s where the return starts. A corporation reports the statement to the CRA on Schedule 125 using coded lines from the General Index of Financial Information, and the CRA asks for the same level of detail you’d show on your own statement. Income tax rules then adjust the accounting profit in places. The Income Tax Act doesn’t demand a specific accounting standard for working out profit, so the accounting number is a starting point and not the final taxable figure.
Schedule 125 is required if gross revenue or assets are $1 million or more. Smaller corporations can use the short form T1178 on paper filings.
A sole proprietor doesn’t file the corporate schedule. The business income goes onto the personal return, and the self-employed tax calculator is the closer tool there. It leaves EI out, so read its result as a partial picture.
How often should you look at it?
Monthly is better than yearly. A statement you only see in March tells you what went wrong a year ago. A monthly one lets you spot a rent jump, a slow season or a supplier price rise while you can still do something about it.
Take two or three lines and watch them. Gross margin is a good one: if it slips from 40% to 36% over a few months, something is leaking, whether it’s discounts, wastage or a cost that crept up. You won’t see that in the bank balance.
What should you do with the result?
Compare it with last year and with your budget. Ask what changed, and whether the change was a choice or a surprise. A profit of $40,000 reads very differently if last year was $55,000.
It also helps to plan for the tax before it arrives. Setting aside a ballpark share of each month’s profit means the bill at tax time doesn’t land on an empty account. Your accountant can give you a better percentage than any rule of thumb here.
What goes wrong on income statements?
Expenses booked in the wrong year lead the list. A December invoice for work done in November belongs in November’s figures, and cash timing doesn’t change that. The next problem is mixing personal costs in. A grocery run on the company card isn’t an operating expense, and it makes the profit look smaller than it is.
Also watch the category you use for owner pay. Wages, dividends and a draw each land on a different line, and only wages count as an expense that lowers profit.
And remember that profit isn’t cash. You can show $40,000 of profit with an empty bank account if customers haven’t paid. That’s a cash flow question, and it has its own statement.
Our sources
The required statement names come from the Canada Business Corporations Regulations, 2001. The GIFI schedule and its $1 million threshold come from the Canada Revenue Agency‘s corporation pages, and the point about accounting profit and the Income Tax Act is from its page on IFRS and taxable income. The examples come from our own calculators using 2026 rules. For any line you’re unsure about, check the private enterprise accounting standard itself.
Frequently asked questions
What are the main parts of an income statement?
Revenue, cost of goods sold, gross profit, operating expenses, other items, tax and net income.
What is the difference between margin and markup?
Margin is profit as a share of the selling price. Markup is profit as a share of cost. On $150,000 cost and $250,000 sales, margin is 40% and markup is 66.7%.
Which CRA schedule is the income statement?
Schedule 125 on the T2 return, using GIFI codes. It is required if gross revenue or assets are $1 million or more.
Is net income the same as taxable income?
Not always. The Income Tax Act doesn't fix an accounting standard for profit, so accounting profit is the starting point and tax rules adjust it.
Can I show a profit and still have no cash?
Yes. Unpaid customer invoices count as revenue but bring in no cash until they're paid.
- How Canadian income tax works: brackets and credits
How federal and provincial Canadian income tax stack up, what marginal and average rates mean, and how credits and deductions change your bill