Corporate Tax Return (T2)

There are two categories of corporations that must file:

• Resident corporations
• Non-resident corporations

Each category has specific regulations for filing corporate tax returns, and there may also be exceptions.

All resident corporations (and non-resident corporations, if applicable) are required to file their corporate tax returns, even if the calculations show no net tax payable.

The only entities that are exempt from this filing requirement include:

• Tax-exempt Crown corporations
• Hutterite colonies
• Registered charities

Resident Corporations

According to Canada's tax regulations, all resident corporations are required to submit their corporate tax returns annually.

This requirement applies to all entities, including non-profit organizations, tax-exempt entities, and inactive corporations. Personal services businesses are also included, although they have additional tax considerations.

A corporation is considered a resident of Canada if it meets one of the following criteria:

1. It is incorporated in Canada.
2. Its central management and control are based in Canada.

If your business qualifies as a resident corporation, you must file your T2 return each tax year.

Non-Resident Corporations

Non-resident corporations have specific requirements for filing corporate tax returns in Canada. They must file if they:

• Conducted business in Canada
• Had a taxable capital gain
• Disposed of a taxable Canadian property (TCP) within the tax year

These corporations must file T2 returns even if their profits are exempt from Canadian tax due to a tax treaty. Other instances requiring filing include:

• Filing Form NR6
• Filing Form T1288
• Claiming a tax refund
• Electing to pay Part I tax under subsection 216(1) or 216.1(1) of the ITA

Corporate Tax Credits & Deductions

Businesses have access to various corporate tax credits and deductions to lower their tax liability. Notable credits include the Investment Tax Credit and the Scientific Research and Experimental Development (SR&ED) credit. Key deductions encompass standard business deductions, the small business deduction, charitable donations and gifts deductions, and capital cost allowance.

Determining eligibility for these tax credits and deductions can be complex. Your accountant can assess your eligibility and help you maximize your tax benefits while ensuring compliance with tax laws and regulations.

Corporations generally pay their income tax in instalments during the year followed by a balance of tax that is paid 2 or 3 months after the end of the tax year depending on your balance-due day.

Instalments are partial payments of the estimated total tax paid throughout the year before the return is due. The Income Tax Act requires corporations to make instalment payments so that they are treated the same as taxpayers who have tax deducted from their income at source.

You must file your corporate tax return within six months of the end of each fiscal year (your corporation's “tax year”).

Here are the rules for determining the last day to file:

• If the tax year ends on the last day of a month (e.g., 30th or 31st), file by the last day of the sixth month after the tax year’s end (e.g., tax year ends March 31, file by September 30).
• If the tax year ends on any other day (e.g., 5th or 15th), file by the same day of the sixth month after the tax year’s end (e.g., tax year ends October 2, file by April 2 of the next year).
• If the due date falls on a Saturday, Sunday, or public holiday, file by the next business day to be considered on time by the CRA.

Whether you file your taxes late or don’t file them at all, the implications can be severe. Therefore, it is beets to pay on time and don’t be late. If you are wondering about the implications of not paying taxes or paying them late, you are in the right place.

Interest and Penalties

If you don’t file your taxes by the due date, the CRA will charge you a late penalty of 5 percent. Plus, you will have to pay an additional 1 percent every month until you file your tax returns. Moreover, the CRA will also charge interest on the taxes you don’t pay.

You may have noticed accounts on your company balance sheet labeled “Shareholder Loan,” “Due from Shareholder,” or “Due to Shareholder” and wondered what they mean.

In simple terms, if one of these accounts appears on the asset side of your balance sheet, it represents money you owe to your company. For instance, you might have taken funds from the company for personal use. Conversely, if it’s on the liability side, it indicates money your company owes you. This could be funds you advanced to the company or personal payments you made for business expenses.

So, what’s the issue?

If the account is on the liability side, there’s no problem; you can withdraw the funds whenever you want without tax implications.

However, if it’s on the asset side, potential issues arise. If you don’t repay that amount within a year, the CRA may classify it as personal income, making you liable for taxes on that income. Additionally, your company won’t be able to deduct that amount, leading to double taxation.

To avoid this situation, you can either declare the amount as a dividend or salary or, if feasible, repay it within the year. Just keep in mind that repaying it before year-end and then withdrawing it again after year-end won’t work; the CRA is aware of such tactics and will treat it as if it was never repaid.

When you pay yourself a salary, the payments are a company expense, which reduces the company’s net income. The salary is personal employment income for you, for which you will be issued a T4 slip. Your company will need to register a payroll account with the CRA and withhold CPP, EI (if applicable), and tax from the payment, which it will then remit to the CRA along with the company’s CPP and EI contributions.

Dividends are not a company expense and do not affect the company’s income or amount of corporate taxes payable. They are paid from the company’s after-tax income. Since tax has already been paid on the amount of the dividends, your personal tax liability will be reduced through a dividend tax credit. You, and any other shareholders who received dividends, will be issued T5s.

The advantages of paying yourself a salary:

• A salary allows you to contribute to your RRSP whereas a dividend does not.
• You have CPP contributions that will increase the amount of CPP you collect when you reach the age of 60-65. On the flip side, you have less available cash now.
• Since income tax is withheld from your salary, you won’t be faced with an unpleasant tax situation when it’s time to file.

The advantages of paying yourself dividends:

• If maximizing your cash now is more important than maximizing it in the future, dividends will accomplish this objective.
• You’ll have less red tape to deal with, like setting up a payroll account with the CRA and making regular remittances. This is probably most beneficial in the early years of your corporation when you’re simply trying to grow your business.
• Since T5s are only issued at year end, there’s only one chance of incurring a late filing penalty.

Which method of paying yourself has lower combined corporate and personal tax?

Unfortunately, there’s no one-size-fits-all answer to this question. This is something that needs to be examined on a case-by-case basis by a tax specialist.

When you pay yourself a salary, these payments count as a company expense, reducing the company's net income. The salary is considered personal employment income for you, and you will receive a T4 slip. Your company must register a payroll account with the CRA and withhold CPP, EI (if applicable), and tax from your salary, which will then be remitted to the CRA along with the company’s CPP and EI contributions.

On the other hand, dividends are not classified as company expenses and do not impact the company’s income or corporate taxes. They are distributed from the company’s after-tax income. Since tax has already been paid on dividends, your personal tax liability will be lessened through a dividend tax credit. You and any other shareholders who receive dividends will receive T5 slips.

Advantages of Paying Yourself a Salary:

• A salary allows you to contribute to your RRSP, whereas dividends do not.
• CPP contributions from your salary will increase the amount you collect when you reach retirement age (60-65), although it means less cash available now.
• Since income tax is withheld from your salary, you won't face an unpleasant tax situation during tax season.

Advantages of Paying Yourself Dividends:

• If immediate cash flow is more important than future income, dividends will help achieve that goal.
• There’s less administrative work, as you won’t need to set up a payroll account with the CRA or make regular remittances, which is particularly beneficial in the early years of your corporation when you're focusing on growth.
• T5 slips are issued only at year-end, meaning there’s a single opportunity to incur a late filing penalty.

Unfortunately, there’s no universal answer to this question. It needs to be evaluated on a case-by-case basis by a tax specialist.

Provincial Corporate Tax Rates

You can find the general tax rates and small business tax rates for all provinces except Alberta and Quebec here. Corporation tax rates - Canada.ca

For Alberta and Quebec the tax rates in those provinces, please refer to their respective government websites.