A Canadian Guide to Filing and Paying Corporate Tax
What is corporate tax?
Corporate tax is the federal and provincial income tax for corporations who do business in Canada. Federal income tax is filed as a T2 corporate return, but each province has their own way of handling the provincial income tax.
Who has to file a corporate tax return?
All corporations operating in Canada have to file a T2 return, including non-profits, tax-exempt corporations, and inactive corporations. So even if your corporation has no income for the year, as long as that corporation exists, taxes must be filed.
Who has to pay corporate tax?
Most corporations in Canada will have to pay corporate income tax.
Even if your corporation isn’t actually in Canada, you may still have to pay corporate income tax in Canada if your corporation:
- carried on business in Canada
- had a taxable capital gain
- disposed of taxable Canadian property.
Some corporations don’t have to pay corporate income tax
Tax-exempt Crown corporations, Hutterite colonies, and registered charities are not required to file, or pay corporate income tax (but each has their own unique filing obligations with the government).
How much corporate tax do you have to pay?
Your corporate tax rate will vary depending on the size of your business, and which province you’re in.
The baseline tax rate for all corporations is 38% of taxable income; it’s called Part 1 tax.
However, income earned within Canada is eligible for a federal tax abatement, which drops Part 1 corporate tax to 28%. There are other deductions and tax credits available too—check out this CRA page to see if you qualify for any of them.
Good news for small businesses
Sometimes, there’s an advantage to being the little guy—Canadian owned and controlled small businesses may be eligible for the small business deduction, bringing the tax rate down to 10.5%. The business limit on receiving the small business deduction is $500,000, meaning that corporate income up to the amount of $500,000 is eligible for the small business deduction.
The CRA does provide a worksheet to do a quick estimate of your corporate taxes, but to get the most accurate assessment, it’s best to work with a CPA.
Provincial corporate tax rates vary by province, and like the federal tax, each province also carries a low and high rate based on corporate income. You can find your province’s tax rates below:
- Newfoundland and Labrador
- Nova Scotia
- New Brunswick
- Prince Edward Island
- British Columbia
- Northwest Territories
Quebec and Alberta currently don’t have corporate tax agreements with the CRA, but you can find out about their provincial corporate tax rates from their websites:
Filing your corporate income tax
In Canada, your corporation’s fiscal year, and income level, will affect when and how you file your corporate taxes.
Deadlines for filing
You must file your taxes within six months of the end of your tax year.
If your tax year ends on the last day of the month, then your taxes are due six months later, on the last day of that month. But if your tax year ends mid-month, then your taxes are due six months later on the same day in that month.
Here’s an example—if your tax year ends on December 31, 2017, your taxes must be filed by June 30, 2018. If your tax year ends on December 4, 2017, your filing deadline is June 4, 2018.
If your due date falls on a weekend or holiday, it can still be filed on time by sending it in the next business day after your deadline.
Are you the forgetful type? Turns out the CRA made an app for that. The CRA Tax Reminders app is designed to help you stay on top of all of the necessary dates for filing and paying your corporate taxes.
How to file
To file your corporate income taxes, use the CRA’s My Business Account (for business owners) or Represent a Client (for employees and representatives) portals. To file a paper copy of your corporate taxes, you can also print the T2 Barcode Return to send in with your return.
In the cases of corporations with annual gross revenue over $1 million, electronic filing is mandatory. In case you hadn’t noticed yet, the CRA loves exceptions, and the correct way to file your corporate tax is no… exception.
How to pay your corporate income tax
Now that you know how much to pay, and when to file, let’s take a look at how you actually get money to the CRA.
Corporations in Canada pay their taxes in instalments, so that payments are spread out across the year. They can be made either monthly, or quarterly. In the case of new corporations, or corporations owing under $3,000 in taxes for the year, you may not have to make instalment payments.
To calculate your instalment payments, the CRA has created a series of worksheets to help you through the process—one to estimate your 2018 taxes, one to calculate monthly instalments, and one to calculate quarterly instalments.
You can pay by debit, pre-authorized debit, online banking, credit card, wire transfer, a service provider, cash, or at your Canadian financial institution. Basically, everything but Bitcoin. Also, you have to pay in Canadian dollars.
For detailed instructions on each method, read the CRA’s breakdown.
End of year tax balance
Even though you’ve made payments throughout the year, once you’ve calculated your year end taxes, you may still owe a balance to the CRA. Generally speaking, the balance of your corporate taxes is due two months after the tax year end. We know that we’re starting to sound like a broken record, but turns out that (you guessed it) there are exceptions.
In cases where you think you’ll be reassessed for a previous year, you can also make advance payments. To do so, you’ll need a specific payment voucher from the CRA.
Advance payments can be made for the following reasons:
- amount owing
- instalment for an unassessed tax year on your corporation account
- instalment for an unassessed period on your GST/HST account
- remittance due on your employer account
Watch out for penalties
It probably seems obvious that making late payments on your taxes will incur penalties, but there are some other less obvious penalties to look out for.
Penalties for late filing
Failure to file your T2 taxes on time will result in penalties. These penalties amount to 5% of the amount owing on your taxes, plus an extra 1% for each full month that your tax filing is late. The late penalty for filing may jump to 10% if the CRA sends a demand to file, when there has also been a failure to file in any of the three previous tax years.
The lesson here is basically file your taxes on time; your future self will thank you for it.
Penalties for late payment
Interest on late or insufficient installment payments is compounded daily.
If your corporation’s late payment interest reaches an amount over $1,000, it may also be subject to an added instalment penalty.
There are also penalties for false statements, omitting information from your corporate tax return, for not reporting income, or for helping or advising someone to file a false claim. More about penalties on the CRA’s website.
On occasion, the CRA may waive penalties if extraordinary circumstances like a flood, or death in your immediate family, inhibit you from filing or paying your taxes on time. But extraordinary really means extraordinary—”I was too busy and I forgot” or “my Internet was down” definitely don’t count.
There’s no mincing words here—filing your corporate taxes is complicated. We strongly recommend working with a CPA to make sure that you’re filing and paying the right amount at the right time, and getting all the deductions you possibly can.
And if your books aren’t up to date, our catch-up bookkeeping service can bring some much-needed relief to the most stressful season of the year.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.