Even if they do not owe taxes, all Canadian corporations, including non-profit organizations, tax-exempt businesses, and inactive corporations, must submit a T2 form for each tax year, i.e., they must file a tax return within six months of the end of their tax year. Tax-free Crown corporations, Hutterite colonies, and businesses that were continuously registered as charities throughout the year are the only entities that are excluded from this rule.
While this post provides a general guide for filing a corporate tax return, filing a tax return for a corporation is complex. From missed deductions to improperly claiming credits to non-compliant bookkeeping and financial statement preparation to ensuring all the necessary forms are filed accurately and on time, there are numerous moving parts to a corporate tax return.
Don’t take chances; the repercussions are heavy for corporate entities, and the rules are stringent. Partner with expert tax problem solvers to protect yourself, your corporation, and your employees.
Preparing to File a Corporate Tax Return
One of the first considerations is knowing when your corporation is required to file a tax return. Corporations have six months from the end of their fiscal year to file their returns. A corporation’s fiscal year generally ends one year from the date of its incorporation, and it cannot be longer than 371 days or 53 weeks.
Corporate Tax Return Forms
Every corporation that carried on business in Canada during its fiscal year must file a T2 return at a minimum. There are, however, two T2 forms – a nine-page T2 Corporation Income Tax Return, which any corporation can use, and a two-page plus schedule T2 Short Return that qualifying corporations can file.
Other common schedules that accompany a corporation’s return can include:
- Schedule 1: Net Income for Tax Purposes
- Schedule 8: Capital Cost Allowance
- Schedule 100: Balance Sheet Information
- Schedule 125: Income Statement Summary
- Schedule 50: Shareholder Information
- Schedule 24: First-time Filer after Incorporation
- Schedule 3: Dividend Received, Taxable Dividend Paid, and Part IV Tax Calculation
- Schedule 11: Transactions with Shareholders, Officers or Employees
Records You’ll Need if You’re Filing a Corporate Tax Return
The records a corporation relies on to file its return will depend on several factors, such as the type of business it conducts, its assets, its billing and bookkeeping policies and how it performed financially, among many other considerations.
Generally speaking, however, records commonly required to file a corporate tax return can include:
- Its incorporation papers
- The previous year’s tax returns and Notice of Assessment
- Business records such as invoices and receipts
- Payroll information, including payable employee deductions
- Financial statements
- GST/HST information
Staying organized is crucial. It’s much easier to update your books daily, keep all your paperwork safe and organized, record all of your transactions and keep business and personal accounts separate than it is to try and pull everything at the last minute to meet your corporation’s tax return obligations.
Filing a Corporate Tax Return in Canada
At the time of this writing, corporations with an annual gross income exceeding $1 million must file their corporate tax returns electronically; however, changes have been proposed to remove this threshold so that essentially all corporations will be required to file their returns electronically.
To do so, you must use software approved by the CRA to prepare your return. This ensures that the CRA is able to process the return and that it meets their specifications.
Filing a Paper Return
You can call 1-800-959-5525 or use this link to find the appropriate CRA centre to mail your return. There are CRA corporate tax return processing centres in Winnipeg, Sudbury, and Summerside.
Paying Corporate Taxes to the CRA
Any taxes owing must be paid in either monthly or quarterly instalments, unless the taxes payable under Part I, Part VI, Part VI.1, and Part XIII.1 for either the previous year or the current year is $3,000 or less. In most cases, the balance of tax owing must be paid within two or three months of that tax year.
What Happens if You’re Late Filing Your Corporate Tax Return?
The CRA levies a fine against corporations that file a late return. The penalty is 5% of the unpaid tax owing on the filing date, plus an additional 1% for each entire month the return is late, up to a maximum of 12 months.
If the CRA issued a demand to submit the return under subsection 150(2) and imposed a penalty for failure to file for the corporation in any of the three previous tax years, the corporation would face an even higher penalty. The penalty is 10% of the unpaid tax at the time the return was due, plus 2% for each completed month the return is late, to a maximum of 20 months.
Also, larger corporations, those with a total taxable capital employed in Canada of over $10 million at the end of the year, face stiffer penalties for filing late returns. If a large corporation fails to file its returns, it can be fined an additional 0.0005% of the corporation’s taxable capital employed in Canada at the end of the tax year plus 0.25% of the Part VI tax payable by the corporation before deductions.
Rectifying Corporate Tax Return Reporting Errors
If you’ve made mistakes on previous corporate tax returns or have outstanding returns that you haven’t filed for your corporation (or for your personal returns), as long as the CRA has not begun any enforcement actions or investigations against you, you may qualify for the Voluntary Disclosures Program (VDP).
The VDP provides an opportunity to rectify previous tax reporting errors under one of two streams, the general program and the limited program.
The general program offers assistance to businesses that seek to fix unintended mistakes by exempting them from any fines or criminal referrals as a result of the information they reveal. Also, for the years prior to the three most recent years of returns that must be submitted, the CRA can grant partial interest relief.
Under the limited program, however, relief is limited to avoiding criminal prosecution or being charged with gross negligence penalties. Corporations accepted into the limited program, however, can still be charged other penalties and applicable interest.
If you’re considering applying to the VDP, learn vital information about filing a voluntary disclosure application.