What is the T2 corporation income tax return? - Guide for small business owners

The T2 return is a mandatory tax requirement for all incorporated businesses in Canada. Whether your business is active or not, whether it makes a profit or not, you must file this return with the Canada Revenue Agency (CRA) to meet your tax obligations.

This detailed guide will help you:

✅ Business owners who want to better understand their T2 return.
✅ SMEs and growing businesses who want to optimize their taxation.
✅ Dormant companies that are required to file a return despite a lack of activity.

Our aim with this guide is to explain the most important points to understand so that you don't miss anything when filing your T2 tax return.

What is a T2 tax return in Canada?

The T2 return is a mandatory tax form for all corporations in Canada. It is used to report the company's net income, expenses and corporate income tax payable.

This form is not limited to a simple return. Depending on the company's situation, several schedules may be required to detail the financial statements, claim tax credits and justify tax deductions claimed.

What is the difference between a T2 return and a T1 return?

The T2 return is used by incorporated companies to declare their income, expenses and corporation tax. It is also mandatory for inactive companies. The T1 tax return, on the other hand, is used by individuals and the self-employed to declare their personal income, including salaries, income from unincorporated businesses and other sources of income.

An incorporated entrepreneur must file a T2 for his company and a T1 for his personal income.

The types of T2 forms available

Every company must file a T2 corporation tax return for each tax year. You can complete one of two types of forms:

File a T2 return (8 pages)

The standard T2 form is used by most companies to declare their taxable income, expenses and tax payable. In addition to the main form, companies are required to submit:

• The company's financial statements, including the balance sheet (Schedule 100) and the profit and loss account (Schedule 125).
• Specific schedules, such as Schedule 1, which adjusts accounting income to arrive at taxable income.
• The information required to claim applicable tax credits and deductions.

File a T2 Short return Form

Some companies can complete a simplified version of the T2 form, called the T2 Short Form. This form, which is only two pages long and has a maximum of three schedules, is reserved for companies that are:

• Are Canadian controlled private corporations (CCPCs).
• Have revenues of less than $1 million.
• Do not operate internationally.
• Are not claiming complex tax credits.

Any company that does not meet these criteria must complete the standard Form T2 with all required schedules.

Who is required to file a T2 income tax return in Canada?

All corporations incorporated in Canada must file a T2 return annually, even if they have no income or business activities. This requirement applies to:

• Active corporations with or without tax liability.
• Inactive companies that must still declare their tax status.
• Non-profit organizations, even if tax exempt.

Non-resident companies may also be required to file a T2 return, even if they are not established in Canada (such companies should check their tax obligations with the CRA to avoid penalties). This requirement applies in particular if a foreign corporation:

• Carries on business in Canada;
• Realizes a taxable capital gain.
• Sells or transfers taxable Canadian property.

Which companies are exempt?

Some companies are not required to file a T2 return. This is particularly the case for partnerships, as their income is taxed directly between the partners.

However, if a partnership is associated with a corporation in a joint venture, certain tax obligations may apply. It is recommended that you consult the CRA Guide to verify the applicable rules.

Do inactive companies have to file the T2 form?

Even if a corporation is inactive, it must file a T2 return. This requirement allows the CRA to confirm that the corporation is still in existence and is not generating taxable income.

An inactive corporation may also be required to report certain management expenses or losses that can be carried forward. Failure to file a return may result in penalties or make it difficult to resume operations.

If a corporation no longer wishes to be required to file a T2 return, it must formally dissolve itself with the appropriate authorities.

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What are the deadlines for filing the T2 return?

Each company must file its T2 return within six months of the end of its tax year. This deadline applies to all companies, whether they have income or not.

• If the tax year ends on the last day of a month, the return must be filed no later than the last day of the following sixth month.
  • For example: A corporation whose fiscal year ends on December 31 must file its return by June 30.
• If the fiscal year ends on a day other than the last day of the month, the return must be filed on the same day of the sixth following month.
  • For example: A corporation whose fiscal year ends on August 22 must file its return by February 22.

When do we have to pay taxes to the tax authorities?

Companies must pay their taxes in two stages: first in the form of corporate tax installments during the tax year, and then by paying the balance at the end of the tax year.

The corporate tax installments are advances on the total estimated tax for the year. They are required for businesses with more than $3,000 in taxes due and are intended to spread the tax burden throughout the year, much like payroll deductions for employees.

Once the tax year is over, the business must pay the balance of its taxes within a certain time period. The deadline varies depending on the type of business:

• The vast majority of corporations must pay their balance within two months of the end of the tax year.
• Canadian-controlled private corporations (CCPCs) that qualify for the small business deduction (SBD) have three months to make this payment.

For example, a corporation with a December 31 year-end must pay its taxes by February 28. If it is a CCPC eligible for a due date three months after its fiscal year-end, it can defer payment until March 31.

Late filing penalties and interest

Failure to file a corporate income tax return or pay the tax on time results in financial penalties that can add up quickly. If a corporation files its T2 return late, the Canada Revenue Agency (CRA) may impose the following penalties

• Basic penalty: 5% of the unpaid balance, plus 1% per month of delay up to a maximum of 12 months.
• For repeat offenders: If a company receives a late payment penalty more than once, these amounts may be doubled.

In addition to the penalties, the CRA will apply daily compound interest on any unpaid tax balance from the day after the payment deadline. This interest is calculated at a rate set by the government on a quarterly basis and applies for as long as the balance remains unpaid.

If you find an error or omission on your return, you can request a reassessment by filing Form T2ADJ. This correction allows the amounts reported to be adjusted and avoids potential complications in the event of an audit.

If you are having difficulty meeting tax deadlines or need to make adjustments, you should contact the CRA as soon as possible. Depending on the situation, payment arrangements can be negotiated or clarification of the steps to be taken can be obtained to limit unnecessary penalties and interest.

What information should be included in your corporate income tax return?

Whether you choose to file your own corporate income tax return or use the services of a tax professional, certain information is essential to completing Form T2 and its schedules.

Here are the most important items to gather before you begin:

• Company identification: name, address, and business number (BN) assigned by the Canada Revenue Agency.
• Shareholders and Authorized Signatories: Full names, addresses and countries of residence of the shareholders and authorized signatories of the corporation.
• Complete financial statements: balance sheet (Schedule 100) and income statement (Schedule 125) prepared in accordance with the General Index of Financial Information (GIFI).
• Activities and sources of income: nature of activities, operating income, investment income or other financial sources.
• Affiliations: Review affiliations with other companies and ownership interests in other companies (Schedule 50 - Affiliates).
• Transactions Abroad and in Canada: Indicate any international activities, ownership of property abroad, or operations in multiple Canadian provinces.
• Dividends: Receipt or payment of dividends to be reported in Schedule 3 - Dividend Income.
• Purchase or sale of fixed assets: If the corporation has purchased or sold assets, these transactions must be reported and may affect the capital cost allowance (Schedule 8).

This list is not exhaustive, but it covers the main elements needed to complete the T2 return accurately and avoid errors or omissions that could result in penalties.

What are the main T2 schedules?

When filing a T2 return, certain schedules must be completed based on the company's financial and tax information. These schedules allow the Canada Revenue Agency (CRA) to assess the company's financial position, apply tax deductions and determine corporate income tax.

The following are the main schedules used on most T2 returns. Other schedules are available and can be found in the CRA's T2 Corporation Income Tax Guide Index. 

Schedule 100 - T2SCH100 Balance Sheet Information

Schedule 100 is essential for reporting a company's financial position at the end of its fiscal year. It allows the CRA to have an overview of the company's solvency and to assess the consistency of the information reported. It must include:

• Assets: cash, receivables, inventory, investments, fixed assets;
• Liabilities: debts, bank loans, accounts payable, taxes payable;
• Equity: share capital, retained earnings.

By correctly completing this schedule, a company allows the rating agency to ensure that its financial statements are accurate and consistent with the accounting information provided.

Schedule 125 - T2SCH125 Income Statement Information

Schedule 125 details the company's income and expenses for the tax year. It is critical in determining the pre-tax net income, which is used as the basis for calculating corporate income tax. Common items to report include:

• Sales and operating income.
• Investment income: interest, dividends.
• Payroll and employee benefits.
• Operating expenses: rent, utilities, supplies.
• Depreciation of fixed assets (calculated on Schedule 8).

A compliant income statement is essential to ensure that tax is calculated on accurate taxable income.

Schedule 1 - T2SCH1 Net Income (Net Loss) for Income Tax Purposes

Schedule 1 is used to adjust accounting net income to arrive at taxable income. Some expenses recorded in the financial statements are not deductible for tax purposes, while others require adjustments. Common expenses and adjustments:

• Accounting depreciation, replaced by capital allowance (Schedule 8).
• Entertainment expenses (only 50% deductible).
• Fines and penalties (not deductible).

Schedule 8 - T2SCH8 Capital Cost Allowance (CCA)

Schedule 8 allows companies to claim Capital Cost Allowance (CCA) on their fixed assets. This tax mechanism allows the value of assets acquired by the company to be written off to reduce its taxable income. Assets eligible for CCA

• Equipment and machinery.
• Vehicles used for business purposes.
• Industrial buildings and land.
• Computer hardware and software.

Companies must apply the appropriate depreciation rate for each asset category according to the rules established by the CRA.

Schedule 3 - T2SCH3 Dividends Received, Taxable Dividends Paid and Part IV Tax Calculation 

This schedule is used to report dividends received and paid by the corporation and the Part IV tax applicable to intercompany dividends.

Why this schedule is important:

• It identifies dividend income received and its tax treatment.
• It helps calculate the tax payable on certain taxable dividends.

Companies must ensure that dividends are correctly reported to avoid errors in calculating the tax due.

Schedule 4 - T2SCH4 Continuity and Use of Corporate Losses

Schedule 4 allows companies to carry forward their operating losses to reduce their income tax liability in prior or future years.

The types of losses reported are:

• Operating losses, which can be carried back 3 years or forward 20 years.
• Capital losses, which can be carried back 3 years and forward indefinitely, but can only be used against capital gains.

This provision is particularly useful for growing businesses or those that have had a loss year.

Schedule 7 - T2SCH7 Total Investment Income and Small Business Deductible Income

Schedule 7 is used to report investment income received by a business and income eligible for the Small Business Deduction (SBD). This information is essential to distinguish active from passive income, as only income from an active business activity qualifies for the reduced tax rate through the SBD.

Items reported on Schedule 7:

• Interest earned on investments: savings accounts, bonds, time deposits.
• Rental income from real estate.
• Dividend income from unrelated corporations.

The CRA imposes a higher tax rate on passive income, which can affect corporate tax planning. It is therefore important to clearly distinguish these sources of income on the T2 return.

Schedule 6 - T2SCH6 Summary of Capital Asset Dispositions

Schedule 6 is required when a corporation sells or disposes of a capital asset resulting in a capital gain or loss. This document is used to report these transactions and assess the tax consequences to the company.

The items reported on Schedule 6 are:

• The sale price of the capital asset: land, buildings, equipment, vehicles.
• The capital cost of the asset sold (original purchase price + improvements made).
• The capital gain realized (difference between the sale price and the capital cost).
• Capital losses that can be carried forward to previous or future tax years.

Note: Only 50% of the capital gain is taxable. However, capital losses can only be offset against capital gains, not against the company's operating income.

Schedule 2 - T2SCH2 Charitable and other donations

This schedule is used by companies that have made donations to registered charities in order to claim a tax credit.

The items declared in Schedule 2:

• The total amount of donations made during the tax year.
• The identity of the recipient organizations (only donations to charities registered with the CRA are eligible).
• The amounts carried forward if unused donations are applied to a previous year.

Tax optimization: a company can claim a tax credit of up to 75% of net income for eligible donations. Unused donations can be carried forward for 5 consecutive years.

Schedule 9 - T2SCH9 Affiliated and Associated Entities

Schedule 9 is used to identify and report entities that are related or affiliated with the reporting entity. It is important to determine whether these entities must share certain tax limitations, particularly the Small Business Deduction (SBD).

A company is considered to be related to another if there is a relationship of control or significant ownership between them. Schedule 9 must be completed in the following cases:

• Direct or indirect control: One company owns more than 50% of the voting shares of another company.
• Control by the same group: Two companies are controlled by the same person or group of persons.
• Cross-ownership: A person controls one company and a related person controls another company, with a shareholding of at least 25% in either company.

The CRA imposes specific rules to prevent related companies from circumventing the tax limits by using the SBD multiple times. Once the related companies have been identified using Schedule 9, these companies must share the $500,000 SBD limit in order to comply with the tax rules.

Schedule 23 - T2SCH23 Business Limit Allocation Agreement Between Affiliated Canadian Controlled Private Corporations

Schedule 23 is a supplement to Schedule 9 and applies only to related Canadian-controlled private corporations (CCPCs). Once associated corporations have been identified in Schedule 9, they must use Schedule 23 to allocate the $500,000 business limit associated with the small business deduction among themselves.

This schedule allows you to:

• Determine the allocation of the SBD limit among related entities, thereby preventing a single entity from claiming the entire deduction.
• Avoid errors and tax audits by providing an official statement of the allocation, thus ensuring that the CRA does not arbitrarily redistribute the limit among corporations.
• Optimize the taxation of the group by allocating the DAPE to the entities that would benefit the most.

If a corporation fails to complete Schedule 23, the CRA may decide how to allocate the DAPE among the related corporations, which may be detrimental to the group.

How do I file a T2 tax return with the Canada Revenue Agency?

Whether you use tax preparation software or prefer to hire a tax professional such as T2inc.ca, there are several options for filing your business tax return.

Mandatory electronic filing (EFILE, certified accounting software)

The Canada Revenue Agency (CRA) prefers that T2 returns be filed electronically through the EFILE (electronic filing) service. This method of filing is mandatory for most businesses, except those with gross income of less than $1 million.

The use of certified accounting software offers several advantages:

• Automate calculations and reduce errors;
• Faster processing by the CRA;
• Immediate acknowledgement of receipt, guaranteeing that your return has been filed.

If you use a tax professional or accountant, they will usually use CRA-approved software to ensure a fast and compliant submission.

Where do you mail your paper return?

If your company is not required to file online because its gross income is less than $1 million, you can mail your paper return to the Canada Revenue Agency. You must mail your return to the tax centre that corresponds to your company's head office address. Visit the Canada Revenue Agency website to find the tax centre that corresponds to your business. 

Although it is still possible for some businesses, paper filing is no longer recommended. There are several major disadvantages to this method:

• First, you must download or order all the necessary forms from the CRA. These documents must then be completed by hand, which greatly increases the risk of error.
• Second, processing times are much longer than with electronic submission. It may take several days or even weeks for the documents to be mailed to the appropriate tax office.

T2 Guide: Best Practices to Avoid Mistakes

Completing a T2 return is not always easy, and a simple omission or calculation error can result in penalties or delays in processing by the Canada Revenue Agency (CRA). To ensure the accuracy of your return and avoid tax problems, here are some best practices to follow.

1. Review the mandatory schedules

Each company must complete specific schedules based on its financial situation and activities. Among the most common are:

• Schedule 100 - Balance Sheet Information (Financial Position)
• Schedule 125 - Income Statement (Revenues and Expenses)
• Schedule 1 - Reconciliation of accounting income to taxable income

Failure to include a required schedule may result in requests for additional information from the CRA and delay the processing of your return.

2. Organize your accounting records

A well-completed tax return is based on complete and well-organized accounting records. Before you begin, make sure you have

• Your current financial statements (balance sheet and income statement);
• Bank statements for the relevant tax year;
• Contracts and invoices related to the company's income and expenses;
• Any documentation needed to justify the credits or deductions you are claiming.

Good organization makes it easier to complete the T2 form and reduces the risk of errors.

3. Use Accounting Software or Consult a Tax Professional

The use of certified accounting software can simplify the preparation and electronic filing of your T2 return. These tools allow you to:

• Automate calculations and reduce errors;
• Automatically generate required schedules;
• Submit the return directly to the CRA through the EFILE (Electronic Filing) service.

If your tax situation is more complex (investment income, tax credits, losses that can be carried forward, etc.), hiring a professional to file your business taxes can help you avoid costly errors and optimize your tax burden.

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Do you need help filing your T2 tax return in Canada?

Filing a T2 return is an essential step for any incorporated business in Canada. Whether your business is growing, losing money, or even inactive, you must file your return with the Canada Revenue Agency (CRA) by the required deadline to avoid costly penalties and interest.

A well-prepared return is more than filling out a simple form. It is essential to properly structure your financial statements, optimize available tax deductions, and avoid errors that could lead to additional audits by the CRA.

At T2inc.ca, we help entrepreneurs and small businesses prepare their T2 returns by offering a simplified, fast approach that meets CRA requirements. Whether you want to optimize your taxes or simply ensure your return is completed correctly, our team of tax specialists is here to help.

Still not sure how to complete your T2 return? Contact our experts to avoid mistakes!