How to File Corporation Tax in Canada: Step-by-Step Guide

Every business in Canada has to file a T2 tax return every year. Even if your business isn’t making any money, the Canada Revenue Agency (CRA) still needs you to file this. Most businesses now have to file electronically because of new rules. This speeds up the process of filing corporation tax in Canada and makes it easier for you.

Getting to Know the New Rules for Electronic Filing

There aren’t many paper T2 returns left. You have to file online starting with tax years that begin after 2023. Only four kinds of businesses can still send in paper forms:

• Companies that sell insurance
• Corporations that don’t live in the area  
• Companies that use functional currency
• Organizations that don’t have to pay taxes under Section 149

Did you miss this electronic requirement? The CRA gives you a $1,000 fine right away.

The type of business you have affects your tax rate:

The first $500,000 of active income for small Canadian-controlled private corporations (CCPCs) is only taxed at 9% by the federal government. The rate goes up to 15% after that point. Provincial governments add their own rates on top, which range from 11% to 16% depending on where you live.

Step 1: Choose Your Fiscal Year-End Wisely

Most companies choose December 31 as their default date, but smart business owners think twice. Your fiscal year-end has an effect on your cash flow, tax planning, and when you have to meet deadlines.

Think about the cycle of your business. Retailers often choose January 31 as the day to record holiday sales. Construction companies might choose September 30 before things slow down in the winter. Make sure your fiscal year matches the natural flow of your business.

From this date, important due dates start to happen:

• Send in your T2 return within six months
• Pay your taxes within two months (CCPCs sometimes get three)
• If you owe more than $3,000 a year, pay in four installments.

If your year ends on December 31, you have to file by June 30 and pay by February 28. A lot of businesses are in a rush this winter.

Step 2: Set up your system for collecting documents

Waiting until tax time makes things a mess. Smart businesses keep records all year long. Here are some of the financial statements you should keep:

1. A full income statement that lists all sources of income
2. Full balance sheet with values for all assets
3. A cash flow statement that keeps track of money going in and out
4. A general ledger that shows all the transactions

Keeping track of business expenses:

• Receipts sorted by type, not just thrown in a box
• Digital versions of bank statements (paper fades)
• Records of credit card spending that are separate from personal spending
• Invoices from vendors are stored in order of date
• Contracts with clients that back up claims for revenue

Records of employees and payroll:

Keep track of T4 slips, CPP and EI payments, and the costs of benefits. There is a lot of paperwork that needs to be done for employee stock options. Owner-managers must give a lot of reasons for bonuses.

Proof of purchase of an asset:

There needs to be a paper trail for every car, computer, and piece of equipment. Write down the date of purchase, the cost, the percentage of business use, and any trade-in values. These details are important for figuring out depreciation.

Cloud accounting software like QuickBooks or Xero does a lot of this work for you. Link your credit cards and bank accounts so you can see them all at once.

Step 3: Pick a T2 Form Smartly

There are two versions of T2, but most businesses don’t qualify for the short form.

The complete T2 return:

You have nine pages and a lot of schedules to look at. This detailed version is necessary for big businesses. On average, you should be able to finish 10 to 15 schedules.

The T2 Short Return:

Two pages only sounds tempting, but there are strict rules. Your business must meet all of the requirements:

• Status as a Canadian-controlled private corporation
• No taxable income or a net loss
• Only doing business in one province
• No dividends were paid or received all year
• No claims for refundable tax credits
• Only reports in Canadian dollars
• No Ontario transitional tax debit

Did you miss even one requirement? You go with the full T2 by default. Both forms need Schedule 100 (the balance sheet), Schedule 125 (the income statement), and Schedule 141 (the investments). Your activities will determine what extra schedules you need.

We’ve seen businesses waste hours on the wrong form at ProFuture Tax. A quick check of eligibility stops that from happening.

Step 4: Learn how to finish the T2 process

Get your financial statements right first when filing corporation tax in Canada. If you put in garbage, you’ll get garbage out.

Section 1: Identification:

Carefully enter your nine-digit business number. If you enter the wrong number, it could take weeks to process. Use the exact legal name of your business as it is registered, not the name you use to do business.

Part 2: How to Figure Out Your Income:

Start with the total amount of money you make from all sources. All sales, services, investments, and asset sales count. To find gross profit, subtract the cost of goods sold.

Get the most out of these common deductions:

• Paying employees, not yourself as the owner
• Paying rent for a business location
• Fees for lawyers and accountants who work for you
• Costs for advertising and marketing
• Costs of vehicles per kilometer
• Business insurance premiums
• Interest on business loans (not payments on the principal)
• Costs of office supplies and technology

Capital Cost Allowance (CCA) strategy:

Use the CRA’s set rates to depreciate assets. Computers lose 55% of their value, cars lose 30%, and buildings lose only 4%. You can claim any amount up to the maximum. Lower claims this year leave room for the next few years when you need more deductions.

There are some advantages of the small business deduction. This deduction saves CCPCs thousands of dollars. It lowers the federal tax rate on the first $500,000 of active income from 15% to 9%. If you make more than $50,000 in passive investment income, this limit goes down by that amount.

You need to plan for loss carryback and carryforward. Losses this year cancel out profits from the last three years. You can also carry losses forward for up to 20 years. Strategic timing helps you save the most money on taxes.

Step 5: Use Approved Software to File

The CRA gives its stamp of approval to certain tax programs. Pick one that is the right level of difficulty for you. TaxCycle works well for big businesses with a lot of schedules. You can customize Profile T2 in a lot of ways. TurboTax Business is good for simple cases. DT Max has great support resources.

Breakdown of the filing process:

1. Enter all financial information correctly
2. Fill out the required schedules one section at a time
3. Check the software’s automatic math
4. Use the built-in tool to check for errors
5. Make a PDF copy for your records
6. Send directly to CRA servers
7. Print the receipt for confirmation right away

Confirmation comes in a matter of minutes. If there are any questions later, the receipt number proves that you filed.

Requirements for first-time setup:

Sign up for My Business Account at canada.ca. You will need to make a user ID and password for CRA. Connect your business number to this account. It takes 15 minutes for the whole thing to happen.

Step 6: Take care of payments and installments

The dates for paying taxes and filing taxes are not the same. Mistakes here can cost you money in fines.

Ways to pay:

Online banking is the quickest way to do things. Use your business number to add the CRA as a payee. Pre-authorized debit takes money out of your account automatically. Wire transfers are good for big amounts. You can pay your bank in person, but it takes longer.

When yearly taxes go over $3,000, payments start every month or every three months. The CRA figures out amounts based on estimates from the past or the present. You get to pick which way to go.

Twelve payments make the load equal for everyone. On the last day of the month, each payment goes through. This is a good way to make sure you have money coming in all year long.

Schedule for every three months:

Four payments fit better with a lot of business cycles. The last day of March, June, September, and December is when payments are due. This is the best way for seasonal businesses.

How to figure out the penalty:

The CRA sets the rate at which late payment interest builds up every day. This adds up quickly, about 10% a year right now. If you keep paying late, you’ll get a second penalty. When you add them all up, they can add up to 20% of the taxes you owe.

Automatic payments make sure that payments are made on time. Set them up once using your bank’s online portal.

Getting Help from Experts When You Need It

There are thousands of pages of rules about corporate taxes. Every day, professionals deal with this level of complexity.

What an accounting firm near me can do for me

Local accountants know the rules in your province that affect your business. You need to make sure your accountant firm near me finds deductions that are unique to your industry that you might miss. Face-to-face meetings make it easy to understand complicated problems. Having access all year long is better than rushing around during tax season.

Planning your taxes ahead of time can lower your bills in the future. Advice on how to set up a business structure can help you pay less in taxes. Bookkeeping help keeps records straight. Processing payroll makes sure that the rules are followed. Filing for GST/HST on time. Representation during a CRA audit protects your rights.

Choosing the right accounting professional is important. Check to see if they have the Chartered Professional Accountant (CPA) title. Specifically ask about their experience with corporate taxes. Ask for client references in your field. Know how much the fees will be ahead of time. Make sure you know who really does your return.

Accountants who are good at their jobs save more money than they charge. They find deductions that are worth thousands. Mistakes cost more in interest and penalties. You can also deduct all of your professional fees from your taxes.

ProFuture Tax helps Canadian businesses deal with complicated tax issues. We keep up with all the rule changes that affect your business. We can help you file your corporation tax in Canada properly and keep your business compliant. Your company needs to file its taxes correctly and strategically so that it pays as little as possible and follows all the rules.