By the time your T2 corporate tax return is being prepared, most of the decisions that determine your tax bill have already been made. Corporate tax planning in Canada is about acting while those decisions are still open — before your fiscal year-end.
Here's what to review, and when, so your corporation pays what it owes and no more.
T2 basics
- Who files: every resident corporation in Canada — other than Crown corporations and registered charities — must file a T2 return each year, even if no tax is payable.
- When: within six months of the end of the fiscal year.
- When tax is paid: any balance owing is generally due within two months of year-end, or three months for certain Canadian-controlled private corporations (CCPCs) that qualify.
- Instalments: generally required when tax payable exceeded $3,000 in the current or previous year — monthly, or quarterly for eligible small CCPCs.
Missing the payment date means interest, even if the return itself is filed on time.
Before year-end: the planning checklist
1. Get the books current
Planning depends on knowing your income. Reconcile every account, record all invoices and bills, and produce a reliable year-to-date profit figure. If your books are behind, our outsourced bookkeeping team can bring them up to date.
2. Make the most of the small business deduction
CCPCs can claim the small business deduction, which lowers the tax rate on the first $500,000 of active business income. That limit is shared among associated corporations, and it can be reduced when the corporation (with associated corporations) earns more than $50,000 of passive investment income, or has significant taxable capital. If you hold investments inside your corporation, review this before year-end.
3. Decide how to pay yourself
Owner-managers can take salary, dividends or a mix. Each has trade-offs:
| Salary | Dividends | |
|---|---|---|
| Deductible to the corporation | Yes | No |
| Creates RRSP contribution room | Yes | No |
| CPP contributions | Yes | No |
| Payroll filings (T4) | Yes | T5 slips instead |
The right mix depends on your income needs, retirement plans and the corporation's tax position. If you pay family members, be aware of the tax on split income (TOSI) rules, which can apply to dividends paid to family members who aren't actively engaged in the business.
4. Time your expenses and purchases
- Expenses incurred before year-end are deductible this year; after year-end, next year.
- The timing of equipment and other capital purchases affects your capital cost allowance (CCA) claim for the year.
- Bonuses declared before year-end can be deducted this year if they're paid within 180 days of year-end.
5. Review tax credits and incentives
If your business develops new products or processes, you may qualify for Scientific Research and Experimental Development (SR&ED) tax credits. Claims must be filed within 18 months of the end of the tax year. See our tax credit services.
6. Use or plan for losses
Non-capital losses can generally be carried back three years or forward twenty. Planning when to use them can reduce tax in the years that matter most.
7. Check your GST/HST position
Make sure GST/HST collected and input tax credits claimed agree with your books, and that annual filers are ready to file. Our HST/GST services can review this with you.
8. Clean up shareholder loans
Amounts the corporation lends to shareholders can be included in the shareholder's income if they aren't repaid within one year after the end of the corporation's tax year, subject to some exceptions. Review the shareholder loan account before year-end.
After year-end: preparing the return
- Finalize year-end adjustments and financial statements
- Reconcile payroll (T4s) and dividends (T5s) to the books
- Pay any balance owing by the due date
- File the T2 within six months
- Keep records for at least six years from the end of the last tax year they relate to
Avoid these common mistakes
- Waiting until the T2 is being prepared to think about tax
- Paying the balance owing late because the filing deadline is later
- Missing instalments
- Mixing personal and corporate expenses
- Ignoring the passive income rules that reduce the small business deduction
If the CRA has questions
Good planning includes good documentation. If the CRA reviews your return, organized records make the process faster and simpler. Our CRA audit support team can represent you if you receive a review or audit letter.
Corporate tax planning with ADYZER
ADYZER's corporate tax team prepares and files T2 returns for Canadian corporations, with planning to help you qualify for the small business deduction, apply loss carryforwards and carrybacks properly and file nil returns for inactive corporations. Pair it with our outsourced bookkeeping to start every year-end from clean, current books.
Book a planning call before your fiscal year-end.