Did you know inactive corporations are still required to file a T2 tax return?

As a Canadian business owner, you might think that if your incorporated business is inactive, you can skip filing your T2 tax return. However, this is a common misconception that can lead to significant consequences with the Canada Revenue Agency (CRA). In this article, we'll explain why it's crucial to file and what can happen if you don't.

Why you must file a T2 tax return.

The CRA requires all resident corporations to file a T2 Corporation Income Tax Return every tax year, regardless of their activity level.

This includes businesses that aren’t currently operating or generating income but remain legally incorporated (lnc., Ltd., or Co. at the end of the business name).

The only exceptions to this rule are tax-exempt Crown corporations, Hutterite colonies, and registered charities in most cases.

Consequences of not filing.

Not filing taxes for your inactive corporation in Canada can lead to serious consequences, which include:

Penalties and interest.

The CRA imposes penalties for late or non-filed tax returns even if your business has no income to report or tax payable. This is known as the ITA 162(7) penalty, which is $25 per day, up to a maximum of $2,500.

If you missed filing, they’ll typically send a letter asking you to file your T2 return. Ignoring CRA's letters can lead to the imposition of these penalties and the start of the collection process.

If you had to file a corporate return in Alberta or Quebec, additional penalties could apply.

Arbitrary assessments.

In addition to penalties, the CRA and Revenu Québec can establish an estimated amount of taxes a corporation owes and issue a notice of assessment for this amount.

This estimate is based on the information they have, such as previous tax returns, data from banks, or information from similar businesses in the same industry.

The higher the estimated amount, the quicker the collection process may begin, which can include freezing the corporation’s assets and bank accounts. Fortunately, arbitrary assessments can be reversed once the corporation files its T2 return for the year.

Administrative dissolution.

Continuous non-compliance can result in your business being classified as permanently inactive, potentially leading to administrative involuntary dissolution.

This means your business could be struck off the register, making it difficult to revive or conduct future business activities.

Steps to ensure compliance.

To avoid these consequences, it's essential to file your T2 tax return annually, even if your business is inactive. Here are some steps to help you stay compliant:

1. Close your business account: If you don’t plan on conducting any future business activities, consider closing your business account with the CRA to avoid future filing requirements. 

2. Consult a Tax Professional: If you're unsure about your filing obligations, consult a Tax Professional who can guide you through the process and ensure that you meet all requirements.

3. Stay informed: Keep up to date with CRA regulations and deadlines to avoid missing any important filing dates. 

Filing a T2 tax return for your inactive incorporated business is a crucial step in maintaining your business's compliance and avoiding unnecessary penalties. By understanding your obligations and taking proactive steps, you can ensure that your business remains in good standing with the CRA.

How we can help you.

Navigating the complexities of filing inactive corporate returns can be daunting. Our team of experienced Tax Experts will ensure that your returns are filed accurately and on time, helping you avoid penalties and interest from the CRA.

Expert support at a price that’s affordable for you.

We offer competitive pricing tailored to meet the needs of inactive corporations, making it affordable to stay compliant. Find an office near you to book an appointment with a T2 Tax Expert today. 

*Inactive corporations: No income and no disposition of assets. Participating locations only.