T2 Corporate Tax Returns: A Guide for Small Business Owners

What is a T2 return?

A corporation is a separate legal entity from the people who own it.⁴ The T2 Corporation Income Tax Return is where it reports its own income and works out its own tax. Its tax year is its fiscal period, so the return follows the corporation’s year-end, not the calendar.^4,2

Provincial and territorial tax is worked out on the same return everywhere except Quebec and Alberta. Those two provinces run their own corporate income tax systems, so a corporation earning income there files a separate provincial return as well.⁵

Any corporation can use the full T2 return. A shorter T2 Short Return exists for a Canadian-controlled private corporation with nil net income or a loss for tax purposes, or a tax-exempt corporation, that meets several further conditions.^6,7

Which corporations have to file?

Every resident corporation files a T2 for every tax year, even if there is no tax payable.¹ The CRA’s list of who that includes names non-profit organizations, tax-exempt corporations and inactive corporations.¹ The exceptions it gives are tax-exempt Crown corporations, Hutterite colonies and registered charities.¹

A corporation that was inactive throughout the year, with no balance sheet or income statement information to report, can leave out the financial statement schedules, but the return itself is still due.⁸

When is the return due, and when is the tax due?

They are two different dates, and the tax comes first.

The three-month date is for a Canadian-controlled private corporation that claimed the small business deduction for the current or previous year, and whose taxable income for the previous year, together with any associated corporations, did not exceed its business limit.³

Filing on time does not stop interest. The CRA charges interest on an unpaid balance from the balance-due day, compounded daily, even though the return itself may not be due for months.¹⁰

What goes into the return?

The return starts from the corporation’s financial statements, reported in a standard format called the General Index of Financial Information, or GIFI: a balance sheet, an income statement, and a short schedule of questions about who prepared the statements and how involved they were.⁸

Schedules then turn accounting income into taxable income. A few appear on almost every small business return:

• Schedule 1 reconciles net income on the financial statements with net income for tax purposes, because some amounts are treated differently. A charitable donation, for example, is deducted later, on the way to taxable income.¹¹
• Schedule 8 claims capital cost allowance, the deduction for part of the cost of equipment, vehicles and other depreciable property each year.¹¹
• Schedule 50 lists a private corporation’s main shareholders.⁸

A new corporation’s first return also needs an opening balance sheet, and the closing balance sheet of any sole proprietorship, partnership or corporation whose business or assets it took over.⁸

What is the small business deduction?

A corporation that was a Canadian-controlled private corporation throughout the year may be able to claim the small business deduction, which lowers the federal tax on its active business income up to a limit called the business limit.^12,13 Provinces and territories have a lower rate for the same income, and some set their own business limit.¹³

Associated corporations share one business limit between them and file a schedule saying how it is split. Income from a personal services business or a specified investment business is generally not active business income, so it does not qualify.¹²

That is the tax on the profit inside the corporation. How it is taxed again on its way to the owner is the subject of our guide to salary or dividends.

How is a T2 filed, and who can prepare it?

Electronically. For tax years starting after 2023, every corporation has to file its T2 electronically except insurance corporations, non-resident corporations, corporations reporting in a functional currency and corporations exempt from tax under section 149, and the CRA charges a penalty for not complying.⁶

The return is prepared in software the CRA has certified and filed electronically, by the corporation or by someone it has authorized; a transmitter is authorized on Form T183CORP for each tax year.⁷

Preparing it is not reserved for accountants. The CRA’s own guide sets rules for tax preparers who file corporation returns for a fee, who must file them electronically with few exceptions,⁵ and a corporation can authorize a bookkeeper or an accountant as its representative with the CRA.¹⁴ The work that needs a licensed public accountant is assurance, such as an audit or a review engagement for a lender or investor. Our guide to bookkeepers and accountants sets out where that line falls.

What does the return need from the books?

Every figure on a T2 traces back to the year’s records, so the work really starts there:

• every bank, credit card and loan account reconciled to its statements for the full year
• equipment and vehicle purchases recorded as assets rather than expenses, so capital cost allowance can be claimed on them
• money the owner took out of the corporation or put into it recorded in a shareholder loan account, not mixed in with expenses
• GST/HST, payroll and T4 slips agreeing with what was actually filed and remitted
• receipts and invoices kept for the figures they support

None of it has to wait for the deadline: kept month by month, the books are ready when the return is.

The shareholder loan account deserves the most care. When a shareholder borrows from the corporation, the loan can be included in the shareholder’s own income. One exception is a loan repaid within one year after the end of the corporation’s tax year in which it was made, as long as the repayment is not part of a series of loans and repayments.¹⁵ Knowing the balance at each year-end is what makes that date visible.

What if a T2 is filed late?

The CRA charges a late-filing penalty worked out from the tax that was unpaid on the filing deadline, plus an amount for each complete month the return is late, up to a set number of months.¹⁶ The penalty is larger again if the CRA has issued a demand to file and charged a late-filing penalty in any of the three previous years.¹⁶

There is a deadline for refunds too: a corporation must file no later than three years after the end of a tax year to receive a refund for it.² If several years are behind, the books for each year come first; our catch-up corporate tax filing works through them in order.

A T2 that starts from finished books

We prepare and file T2 returns. With monthly bookkeeping, the accounts are reconciled every month and the shareholder loan, the asset purchases and the GST/HST are kept straight as the year goes, so the return starts from books that are already done. For a corporation whose books we keep, the T2 is a flat $799 plus HST; every other case, including years that have fallen behind, is on our corporate tax filing page.

Frequently asked questions