Every Canadian Corporation, active or dormant, MUST file a T2 Corporate Income Tax Return with the Canada Revenue Agency. There are no loopholes or “opt out” clauses if your corporation has had a poor year. Knowledge of the T2, what goes into it and common issues is vital knowledge for every Canadian Corporation Owner.
If you have just incorporated, or perhaps, never received a simple explanation of what filing this tax return actually involves, this guide explains in clear and simple terms what the T2 is. If the T2 seems overwhelming or your specific tax situation has become increasingly complicated, speaking with a professional firm like Webtaxonline is a straightforward and convenient method to guarantee that your T2 is filed on time, correctly and always in your best interest.
What is T2?
A T2 is a corporation’s federal tax return used to declare income, determine the tax payable to the government and to claim any necessary credits or deductions. This is what companies fill out instead of the T1 that individuals use to file personal tax. However, “the T2 is meant to be used only by corporations-either incorporated companies or other organizations deemed to be corporations by the Income Tax Act.”
Even if your corporation earned no income in the fiscal year, a T2 must still be filed. The CRA does not allow corporations to simply go silent for a year without documentation. Dormant corporations are still required to file what’s sometimes called a “nil return” to confirm their inactive status.
Who Needs to File a T2?
Every corporation resident in Canada must file a T2, which would cover CCPCs, public companies, sometimes crown corporations and non-profit corporations conducting a business. Non-residents operating a business in Canada or disposing of taxable Canadian property will also need to file a T2.
For the purposes of T2, a corporation is deemed resident in Canada if it was incorporated in Canada or if the central management and control of the business is in Canada. This becomes especially relevant for multinational organizations and for those Canadians who seem to spend a lot of time elsewhere:
When Is the T2 Due?
A T2 is due within six months after the end of the corporation’s fiscal year. Thus if your fiscal year end is Dec. 31, then the tax return is due June 30 of the following year. If your fiscal year end is March 31, your T2 return is due Sept. 30.
It’s important to note however, and this is something that catches a lot of business owners off guard, that the tax payable portion of the return is due much sooner than the return itself is due. Typically the tax is due two months after the end of the corporation’s fiscal year. Canadian controlled private corporations with certain attributes (for instance that are claiming the small business deduction) will have three months to pay the tax. Lateness is a separate matter in regards to both filing and payment, both will be subject to penalties.
What Information Goes Into the T2?
The T2 return itself is quite extensive. At its core, it requires a schedule-by-schedule accounting of the corporation’s financial activity. This includes the corporation’s net income as calculated under accounting principles, then adjusted for various additions and deductions required by the Income Tax Act to arrive at “taxable income.”
Schedule 1 handles the reconciliation between accounting income and taxable income — a critical step because the two figures are almost never identical. Depreciation under accounting rules (amortization) is replaced by Capital Cost Allowance under tax rules, for instance. Entertainment expenses may be only 50% deductible. Certain reserves and provisions treated as expenses on the financial statements may not be deductible for tax purposes.
Schedule 100 and Schedule 125 require a balance sheet and income statement respectively, drawn from the corporation’s books. This is why accurate, up-to-date financial records are not just good business practice — they’re a legal requirement of the T2 filing process.
Other schedules include: Schedule 8 for Capital Cost Allowance, Schedule 200 for the primary T2 form, Schedule 50 for shareholders, and many others that may be relevant to your business. A corporation with the Small Business Deduction would use schedule 7 and one involved with scientific research would use schedule 32, among others.
Provincial and Territorial Components
The T2 isn’t purely a federal document. Most provinces have integrated their corporate tax collection with the federal system, meaning the T2 serves as a combined federal and provincial filing. Quebec and Alberta are notable exceptions — they require separate provincial corporate tax returns. For most other provinces, the CRA collects both federal and provincial tax through the single T2 filing.
Provincial tax rates vary, and some provinces offer their own additional deductions or credits. Understanding the applicable provincial component of your return can make a meaningful difference in the total tax result.
See also: Secure Internet Framework 828690072 for Business Success
What Happens After You File?
Once the T2 is filed, the CRA processes the return and issues a Notice of Assessment. This document confirms the CRA’s review of your return and either matches your calculated tax or adjusts it. If the CRA assesses more tax than you filed, you’ll receive a bill for the difference, plus potential interest. If you overpaid, you’ll receive a refund.
The CRA also has the ability to reassess a return for up to three years after the original notice of assessment — or longer in cases involving fraud or misrepresentation. This is why maintaining organized records for at least six to seven years is strongly advised.
Common Complications
T2 may be complicated for corporations which have shareholder loans, related-party transactions, foreign income, and substantial investment income. It is important to document the shareholder loan transactions as loans made by a corporation to a shareholder, which are not repaid within a specified period, will be considered income. This ensures business owners cannot just draw funds from the corporation as a personal piggy bank, with impunity.
The T2 itself, when prepared correctly, with the correct documentation, and using the right information can be completed easily. The reason it appears difficult for many small businesses is due to the fact that the bookkeeping was not kept properly all year. If a clean slate is started for the year, the T2 filing will be very simple when it comes around.
Conclusion
Corporate tax errors can be extremely costly for small businesses, not just in dollars – they can cause worry, attract CRA attention and hinder achieving maximum future profits. Common pitfalls such as commingling personal and corporate accounts, overlooking deductible expenses, neglecting installment payments or not appropriately compensating owner operators all can be easily avoided with proper accounting and tax planning. There is no need to be penalized for such errors however, if only you kept precise documentation and consulted professionals prior to filing, rather than at a crisis hit. Fortunately most tax planning errors can be corrected early with careful record keeping and ongoing business-related advice. Small business is Webtaxonline’s passion; we provide bookkeeping, corporate tax assist, payroll and tax advice to businesses nationwide to help them minimize mistakes and claim all legal tax advantages possible.
