10 Tax Facts that every corporation Owner should Know
There are essentially two types of tax returns for small businesses and the self employed.
If you are an unincorporated sole proprietor or a partnership, you are required to fill out the statement of business activities (T2125) on your personal tax return also referred to as the T1.
If you have set up a Canadian corporation, then you are required to complete a corporate income tax return referred to as a T2 .
Although the accounting for unincorporated and incorporated entities is similar, preparing the T2 is more complex and is generally best outsourced to a qualified accountant. Regardless, it is good to have an understanding of some of the important considerations when thinking about your corporate income tax return.
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Corporate tax rates vs Individual Tax Rates
If you have a corporation, your income is taxed at a significantly lower rate than if you are unincorporated.
The federal rate, for businesses claiming the small business deduction, is 9% in 2024.
Each province then levies additional taxes from 0% in Manitoba to 3.2% in Ontario. (A full list of provincial corporate tax rates can be found here).
It should be noted that in Quebec you must have employees that work a total of 5,500 hours per year to qualify for the Quebec small business tax rate. Otherwise the corporate tax rate that pertains to Quebec small business is 11.5%.
Corporate Small Business Deduction
The Federal (and most of the provincial ) small business rates applies to corporations with active business income of less than $500,000.
There are, however, certain restrictions eg. the corporation must be a Canadian Controlled Private Corporation (CCPC) and the limit applies to all corporations in a group that are considered to “associated”.
Investment entities such as corporations that hold rental properties are also not eligible for the small business tax rate since they are considered to earn passive income.
Corporate Tax Return Deadline
The corporate tax return is due six months from the designated year end.
Note that the year end does not have to be December 31st and can be any date during the year, although best practice is to have the year end on the last day of a month.
Failure to file within the corporate tax deadline results in a penalty which is calculated based on the taxes payable. This means that if you don’t owe any taxes, there will not be any penalties. However, you might be charged a late filing fee.
When is Interest Charged
Federal Corporate taxes payable that are paid within three months after the year end for those corporations that qualify for the small business deduction are not charged interest. Interest will start to accumulate after 3 months after the year end on the income taxes payable.
In Quebec all corporate taxes payable must be paid within two months after the year end to avoid interest.
Interest is separate from, and in addition to penalties, per point 3 above.
This means that even if you do not file your tax return within these dates, you should estimate your taxes payable and remit these amounts to avoid interest.
GIFI VS T2125
The method of accounting for revenues and expenses is generally the same as if you were unincorporated. However, with a corporation instead of completing a T2125, you are required to fill out the General Index of Financial Information also referred to as the GIFI.
The GIFI includes your profit and loss statement, a balance sheet and a notes section which is completed by the preparer of the tax return.
Corporate Business Numbers
In order to file a Corporate tax return, you will need to ensure that you have a business number.
The first 9 digits of the federal business number is the same as your payroll/deductions at source or GST/HST number. Each of these numbers has a different suffix - for corporate taxes, this is suffix ends in RC000*
In Quebec, you also have to ensure that you apply for a separate business number. The system is the same in that you are issued one business number with different suffixes depending on whether it is corporate tax, QST or Quebec payroll deductions. The corporate tax number for Quebec businesses ends in IC000*
Efiling Returns
Corporate tax returns can be efiled directly through CRA My Business Account or by using approved tax software. Same with Quebec corporate tax returns.
Corporate tax instalments
Corporate tax instalments are usually based on prior year’s taxes payable and are usually due quarterly for small businesses.
The amount of corporate tax instalments payable, for quarterly remitters, is 1/4th of the previous corporate taxes payable
If you do not pay corporate tax instalments, then interest accumulates on the amounts that are due but not paid.
If, however, you forecast that your taxable income will be lower in the current year vs the prior year, you can estimate and reduce your instalments payable accordingly.
Corporate Tax Software
Most accountants use tax software to prepare income tax returns. Some of the more popular corporate tax software inlcude DT Max, ProFile and TaxCycle.
Tax software is also available for non accountants who want to do their own tax returns (although I advise caution on this as corporate tax returns are more complex than personal business tax returns). Two popular ones are Ufile and TurboTax Corporate Versions.
Associated Corporations
If you and/or certain related parties have ownership in more than one corporation, then you will be deemed to be “associated” with the other corporation.
This requires that both corporations share the small business deduction i.e. the total profit for both companies cannot exceed $500,000. It is important to understand this and the implications since failure to report and share the small business deduction can result in significant penalties.
More details on associated corporations can be found here.
It is advisable for Small business owners who are incorporated to contact an accountant either prior to incorporation or shortly after as they can help you with the set up of accounting software and processes, give you guidance on your tax obligations and be there to help you with the inevitable financial and tax queries that come up when running your business.
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