A Guide to Filing Your T2 Corporate Income Tax Return in Canada
This article only applies to incorporated businesses. If you are operating as a sole proprietor (owner of the unincorporated business), this will not apply to you. Filing your corporate income tax return is not as easy as it may seem. It can be daunting and time-consuming.
Whether you are doing so as a new entrepreneur or as a seasoned businessperson, the process can appear rather complex and intimidating. But we wish to reduce that stress and lend you a helping hand. Even if you hire a tax accountant to help in filing your corporate taxes, we believe that it’s helpful for all business owners to understand the concepts and what is being done behind the scenes.
This article is not business advice. It’s a general guide to help small business owners understand the process. If you need to discuss your particular tax situation, it’s advisable to seek advice from a tax professional. We will discuss everything you need to know about corporate taxes: starting by explaining if your corporation has to file taxes, when the filing and payments are due and how to file them.
Let’s get started!
What is corporate income tax?
In Canada, the corporate income tax is a portion of your company’s annual profit that you must pay to your provincial and/or federal government. These taxes are generally used by the governments to pay for all general citizen’s needs. Taxpayers in general do not decide what they are used for. The tax is paid on a company’s taxable income, which is revenue minus the
cost of goods sold and other expenses (such as general and administrative expenses, rent, insurance, utilities, marketing costs, depreciation, and other operating costs).
Corporations are taxed separately from their owners. And tax rates for a corporation are generally lower than personal income tax rates. This means that there are tax advantages in owning an incorporated business.
Who has to file a corporate tax return?
According to the Canada Revenue Agency (CRA), publications, “All resident corporations (except tax-exempt Crown corporations, Hutterite colonies, and registered charities) have to file a corporate income tax return (T2) every tax year even if there is no tax payable”. So unless your corporation is tax-exempt Crown corporations, Hutterite colonies, or a registered
charity your Canadian resident corporation has to file corporate tax returns and pay the liability of any. To learn more about corporation residency, refer to our article on the subject.
Non-resident corporations have to file a tax return only if they have:
- a taxable capital gain, – may have an exemption if the disposition meet certain criteria
- disposed of Canadian property – may also have an exemption if certain criteria are met,
- or carried on business in Canada.
Even if you are exempt from filing a T2 corporate tax return as a non-resident corporation, you may still want to file if you need to claim refunds or other situations. The same applies to provincial corporate tax returns.
Note: All corporations, including non-resident corporations, must file their T2 return, schedules, and the General Index of Financial Information in Canadian funds only even if the corporation uses multiple currencies in its operation and transactions.
How is the corporate income tax calculated?
The starting point for calculating the corporate tax is the net income or loss from the financial statements. This is why it’s necessary to prepare accurate financial statements prior to preparing the corporate tax returns. The taxable income is then derived from the financial statement’s net income (loss). Then net income for tax purposes is calculated by subtracting non-deductible expenses. After that, specific deductions are applied to arrive at taxable income, which gets taxed at prevailing rates depending on federal and provincial tax brackets the corporation falls in.
For active business income, at the time of writing this article, the basic Part I tax rate is 38% of corporate taxable income. This is equal to 28% after applying the federal tax abatement of 10%. Thereafter the general tax reduction, the net tax rate is 15%. For Canadian-controlled private corporations (CCPC) claiming the small business deduction, the net tax rate is 9%.
The provincial and territorial corporate income taxes vary from a low of 0% (Manitoba) to a high of 4% (Quebec). Most small businesses fall into the CCPC rate which adds up to 9 to 13% depending on the corporation’s province or territory residency.
Note: Income earned outside Canada is not eligible for the federal tax abatement. And investment income is taxed higher than active business income.
When are corporate income taxes and payments due?
Most small businesses have to file their taxes six (6) months after their fiscal year ends. But payment is due three (3) months before tax returns are due; when there is tax payable. Both provincial and federal taxes can be paid by cheque, online, or at the corporation’s financial institution branch. Payment by credit cards is also an option with additional fees.
In the first year of incorporation, a business may choose any date as their fiscal year-end unless the corporation is a member of a partnership (in which case the year-end has to be December 31). All other corporations can choose a date from incorporation date up to a maximum of 53 weeks for the first fiscal year. Then the year will be 12 months after that. The fiscal year-end is kept the same for future year-end tax returns filing. This date can be changed at a later time if needed by following appropriate steps.
Penalties are applied to tax returns when they are filed late and there is tax payable. No penalties are applied when the corporation has a loss instead of loss. The penalty is 5% of the unpaid tax that is due on the filing deadline, plus 1% interest on the unpaid tax for each complete month. These penalties and interest on late filing are not tax-deductible.
Corporations that have tax payable of $3,000 or more in the previous tax year are required to make either monthly or quarterly installments depending on the amount payable. The balance of the tax that you owe for a tax year is due within 2 or 3 months of the end of that tax year depending on the circumstances of your corporation.
The installments are not additional taxes. They are paid toward the fiscal year to come. The taxman is not willing to wait 6 months to collect the taxes as they have needs that could not wait. There are also penalties applied when installments are not made when they should be. If your prior-year tax payable was more than $3,000 ask your tax accountant about your
installments, payments, and deadlines.
How are the corporate tax returns filed?
Corporate taxpayers can file their corporate income taxes in-house or with the help of an external professional; either with paper file or electronic.
There are a number of Canada Revenue Agency’s certified software products to choose from. They are designed to reduce errors, save time, and file an accurate and complete tax return. When paper filing the returns are printed and mailed to the CRA appropriate tax center. Depending on the residence of the corporation the paper copies and related schedules are to
be sent to a specific tax center. Their addresses are indicated on the forms.
A professional accountant (CPA) is more likely to save you some frustration, time and save money by getting the maximum tax credits the corporation qualifies for. The software do a good job but they are as good as the input and knowledge of the tax preparer.
Note: If the corporation’s annual gross revenue is more than $1 million you have to file your T2 return electronically. There are also penalties applied to taxpayers who do not follow this filing rule.
What to expect after the corporate income taxes are filed?
After filing, the tax returns are assessed by CRA, and notice of assessment is sent to the corporation either by mail or electronically. It is advisable to compare the notice of assessment to the copy of the corporation’s return. And contact CRA if there is a difference or if clarification or explanation is needed on any part of the assessment. They also provide an
online inquiries service, so taxpayers can ask an account-related question online and they
will provide an answer online.
CRA or the provincial tax department can reassess the return at a later date if needed
CRA usually reassesses a corporation’s income taxes within 6 years if the corporation was a CCPC at the time. This is the reason why it is advised to keep any corporate information (receipts, invoices, cheques, stubs, statements for at least 7 years after filing. If not, it’s four years.
We hope that this article helped you better understand how corporate income tax works in Canada. As important as filing corporate tax returns is the understanding of the need for tax planning.
Tax planning is useful because it helps individuals and other entities plan ahead to pay the least amount of taxes they are required to pay. They can predict how much they will pay in taxes and take action to minimize the tax amount due. So the information from this article is to be used along with other tips on tax planning strategies, to see where there are areas of
opportunity to reduce taxes and increase overall profit.
Whether you’re a growing business, a new entrepreneur, or an established small business, we have the right solution for your needs.
We offer a full range of customized services to help you manage your business – from accounting and financial services to payroll and tax planning. We are passionate about helping you build a strong foundation for success. Contact us today for a free consultation.