When starting a new business, founders often focus on defining their goals, building their networks and stashing cash. While these practices are crucial, one very important, often overlooked aspect of running a successful business is knowing how to prepare and file a corporate tax return.
All incorporated businesses, including not-for-profit organizations, tax-exempt corporations and inactive corporations must file a T2 Corporation Income Tax Return each tax year, even if they do not owe any taxes. To learn the basics of filing a tax return for a business, keep reading!
Staying organized throughout the year will make filing your return a much smoother, easier process. Gathering all necessary information is essential when preparing to file your business’ taxes. Below are some helpful tips to get you started:
- Ensure your expense records are organized and filed by month.
- Sort your bank and credit card statements, deposit slips, receipts and invoices.
- Ensure your revenues, expenses and net income are clear and current.
- Have your company’s Income Statement and Balance Sheet handy.
HOW TO FILE
More than 90% of corporations file their tax returns electronically. To do so, you must use software specially certified by the Canada Revenue Agency (CRA). To see a list of certified software, click here. A return prepared with certified software can then be electronically filed using CRA’s Corporation Internet Filing service or My Business Account.
Filing electronically allows for faster processing and refunds, savings on mailing costs, increased security and helps the environment by using less paper. It is important to note that corporations required to file their taxes electronically must do so, as CRA charges a $1,000 penalty for those that do not comply with mandatory internet filing.
WHEN TO FILE
Corporate tax returns must be filed no later than six months after the end of a corporation’s fiscal period. The fiscal period is the period of a corporation’s full tax year, which is typically 12 months long. A corporation’s fiscal period begins the day it starts its business year and ends the day it ends its business year. If a business’ fiscal period ends March 31, 2021, it must file its tax return by September 30, 2021.
Filing on time is vital, as penalties apply to corporations that file their returns late. The penalty is 5% of the unpaid tax due on the filing deadline, plus an additional 1% of this unpaid tax for each complete month that the return is late, up to a maximum of 12 months.
WHEN TO PAY
Typically, a corporation pays the taxes it owes in monthly or quarterly instalments, throughout its fiscal period. Each instalment goes toward paying the taxes a corporation owes for its current fiscal period (e.g. instalments paid in 2020 are for the amount of taxes owed on the corporation’s 2020 tax return). A corporation does not know the exact amount of taxes it owes until its 2020 tax return is filed, so the exact amount a corporation pays in instalments is an educated guess. This educated guess is based on the amount of taxes the corporation owed in its previous year.
The final due date for a corporation to pay all taxes owed is called the balance due-day. Usually, a corporation must pay the total amount of its taxes owed either two or three months after the end of its fiscal period. If a corporation is not eligible for the Small Business Deduction (SBD), it must pay all taxes owed two months after the end of its fiscal period. If a corporation is eligible for the SBD, it must pay all taxes owed three months after the end of its fiscal period. For example, if a corporation is eligible for the SBD and its fiscal period ends on December 31, 2020, its balance due-day is March 31, 2021.
*This feature was published as a part of our “ From the Experts” series, 2021.