CORPORATE INCOME TAX (T2)
In Canada, corporations are taxed differently than companies that have different legal entity structures. This is because Canadian corporations are considered to be their own legal entities and are distinct from the business owners. As a consequence, corporations are responsible for filing their own income tax returns. Business owners of Canadian corporations will be required to file their T1 personal income tax returns as well as the T2 corporation income tax return for their companies. Corporations that fail to timely file their returns may face penalties and other legal consequences.
Table of Content:
- Why must corporations file income tax returns?
- If a corporation did not make a profit, does it need to file a return?
- Does a non-resident corporation need to file a corporate income tax return?
- Why is it important for corporations to file income tax returns?
- What does it mean to a business owner to file a corporate tax return?
- Consequences of filing late or failing to file corporate income tax returns
- What is the corporate tax rate?
- What is the filing deadline for corporate income tax returns?
- The benefits of partnering with Ensight Cloud CPA for your corporate tax return preparation.
Why must corporations file income tax returns?
Under the Income Tax Act, most resident corporations in Canada are required to file an annual T2 corporation income tax return. The only exceptions are tax-exempt Crown corporations, registered charities, and Hutterite colonies, which are not required to file annual income tax returns or to pay federal income taxes. Corporations that must file a T2 corporation income tax return include Canadian-controlled private corporations or CCPCs, non-profit organizations, inactive corporations, publicly-traded corporations, and other tax-exempt corporations. For corporations that have annual gross revenues of more than $1 million, the T2 corporation income tax return must be filed online.
Certain non-resident corporations will also be required to file T2 returns in some cases. We will explain this more in-depth later in this article.
If a corporation did not make a profit, does it need to file a return?
The law requires all resident corporations that do not fall under one of the previously mentioned exceptions to filing annual corporation tax returns. It does not matter if your company did not make profits or earn income during the fiscal year. Your corporation must still file its annual T2 corporation income tax return by its tax-filing deadline.
Does a non-resident corporation need to file a corporate income tax return?
Certain non-resident corporations will be required to file corporation income tax returns if any of the following situations apply:
- The non-resident corporation conducted business in Canada.
- The non-resident corporation enjoyed a taxable capital gain.
- The non-resident corporation disposed of taxable property in Canada.
Even if a non-resident corporation believes that its gains are exempt from the tax because of a tax treaty, the requirement for filing the corporate income tax return will still apply.
However, non-resident corporations that disposed of taxable property or that experienced capital gains will not have to file a corporate income tax return under some circumstances. When the dispositions do not result in payable tax under Part I for the tax year, the corporation does not have liability to pay taxes for any prior tax year, and the property that was disposed of was excluded property or which had an issued certificate under Sect. 116 of the Income Tax Act, the non-resident corporation will not have to file a corporate income tax return. The taxable property does not include corporate shares and other interests with values that were based on real property in Canada during the previous five years.
Non-resident corporations might also be required to file T2 returns when they have filed approved Forms NR6 because they receive rent from taxable Canadian property or receive timber royalties to pay taxes on their rental or royalty incomes. Corporations that filed approved Forms T1288 to reduce the amount of tax that is withheld on the income that was earned from film and video productions to pay taxes on the net amounts for the current year will also have to file T2 returns.
Finally, non-resident corporations will have to file T2 returns when any of the following applies:
- To claim a tax refund
- To pay Part I tax for net acting services for the current year
- To pay Part I tax on net timber royalties or rental income for the current year
Non-resident corporations that are uncertain about their tax-filing requirements should speak to tax professionals.
Why is it important for corporations to file income tax returns?
While corporate income taxes make up a small portion of the total tax revenues that Canada collects, they are still important for the economy and infrastructure needs of the nation. The provinces also rely on corporate income taxes to help to pay for public needs. Beyond the public good, it is important for corporations to timely file their corporate income tax returns because it is the law. Failing to file returns or to file them by the deadline can result in stiff penalties. Companies that do not file their tax returns or that omit income may be assessed substantial fines that could potentially cost the companies much more than the taxes that are due. Corporations can also benefit by filing corporate income tax returns by taking advantage of the ability to claim a small business tax credit. This helps to reduce the corporation’s tax obligation and might result in a net-zero liability. Some corporations might also be entitled to refunds after they take certain business deductions and claim the business tax credit.
What does it mean to a business owner to file a corporate tax return?
Business owners who structure their companies as corporations are considered to be separate from the businesses. This means that the earned business income does not pass through to their personal income tax returns and must be reported separately. Corporations are considered to be separate legal entities from their owners. This means that business owners will need to file T1 personal income tax returns for themselves and T2 corporate income tax returns for their companies. Business owners should also pay attention to the different filing deadlines. While most personal income tax returns must be filed by April 30 of each year, corporate income tax returns have different deadlines that depend on when their fiscal year ends. Finally, business owners need to make certain that they are aware of the various business deductions and the business tax credit to ensure that their companies only pay what they owe.
Consequences of filing late or failing to file corporate income tax returns
Corporations that fail to file their corporate income tax returns or that file late will face substantial penalties. When a return is filed late, the corporation will be assessed a 5% penalty on the balance of the unpaid tax balance. It will also be assessed a 1% penalty for each month the return was late up to a maximum of 12 months. If the Canada Revenue Agency sent a demand to file a return and assessed a late-filing penalty within the past three years, the penalty for filing a late return will be higher. In that case, the corporation will be assessed a 10% penalty on the unpaid tax balance and a 2% monthly penalty for every month that the return is late for up to 20 months.
If a corporation has an installment interest of more than $1,000, an additional penalty will be assessed. The installment interest penalty will be calculated by subtracting either $1,000 from the interest balance or 25%, whichever is greater.
Large corporations, which are defined as companies with more than $10 million in annual revenues, may face greater penalties when they fail to file their required returns. These companies will have to pay an additional penalty each month that the return was late for up to 40 months in addition to other penalties that are assessed. This amount is calculated by adding 0.25% of the Part VI taxes that the corporation owes with 0.0005% of the corporation’s capital that it has employed in Canada at the tax year’s end.
What is the corporate tax rate?
The federal corporation tax rate differs, depending on the type of corporation. Canadian-controlled private corporations receive the most tax advantages. A CCPC that claims the small business deduction will have a net corporation tax rate of 9%. This net amount can be reduced by claiming a small business tax credit.
Other types of corporations will have a net corporation tax rate of 15% after they have received the general tax reduction. Without the reduction, the basic rate is 38% for Part I tax and 28% after the federal tax abatement.
A province or territory each has its own corporation tax rate. Each province has a lower and higher corporation tax rate. The lower rate is assessed on income that is eligible under the federal small business deduction. Some provinces use the federal business limit for the amount that can be claimed for the small business tax credit or deduction while others have their own limits.
The higher rate is assessed against all other income that the corporations have. In British Columbia, the lower tax rate is 2%, and the higher tax rate is 12%.
What is the filing deadline for corporate income tax returns?
The general rule for filing a corporate tax return in Canada is that it must be filed within six months after the business’s end of its tax year. The business tax year depends on its fiscal year-end. This means that the T2 tax return’s filing deadline might differ among different companies. If a corporation’s fiscal year ends on June 30, the corporate tax return will be due no later than Dec. 31, which is the final day of the sixth month after the end of the company’s fiscal year-end.
When a corporation’s fiscal year falls on a day during a month instead of at its end, the T2 return for the corporation will need to be filed on or before the same day six months following the fiscal year-end. For example, if a corporation’s fiscal year ends on June 10, the company’s T2 return must be filed no later than Dec. 10 of the same year.
In cases in which the filing deadline for a corporate tax return falls on a public holiday or on a Saturday or Sunday, the Canada Revenue Agency will consider it to be filed on time if it is mailed, delivered, or transmitted no later than the first business day following the filing deadline.
Corporations must remember that they must file corporate tax returns every year by their filing deadlines regardless of whether they made any profits. The T2 tax returns must also be filed on time to avoid late penalties as previously detailed.
Corporations and business owners that are unclear about their tax filing deadlines and their other requirements should avoid guessing. Instead, they should consult tax professionals to discuss their situations.
Corporations have different deadlines for paying any balances that they owe on their corporate income tax returns. For most corporations, their balances must be paid in full no later than two months after the tax year’s end. However, corporations that are structured as CCPCs may have three months to pay the balance of their income taxes when they meet the following conditions:
- The business was a CCPC during the entire tax year.
- The corporation claims the small business deduction for the tax year or was allowed to do so in the prior tax year, and its taxable income for the prior year is not more than the business limit for the tax year.
- The taxable incomes for all of the related corporations for the prior tax year do not total more than the aggregate of their business limits.
The benefits of partnering with Ensight Cloud CPA for your corporate tax return preparation
Corporation income taxes can be complex, and companies may face stiff penalties when they fail to file on time. Partnering with us to prepare your corporate tax returns can provide you with several benefits. When you work with our tax professionals, you can ensure that your returns will be timely filed and that they will be accurate. We can advise you about different deductions and credits for which your corporation is eligible to help to reduce the taxes that your corporation might have to pay. Contact us today to schedule a consultation and to learn more about how we can help you.