10 Corporate Income Tax Facts for Small Businesses

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. 

1. Corporate tax rates for small business are significantly lower than if you are unincorporated. The federal rate, for businesses claiming the small business deduction, is 9% in 2020. Each province then levies additional taxes from 0% in Manitoba to 5% Quebec. 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 5,000 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%.

2. The Federal (and most of the provincial ) small business rates applies to corporations with active business income of less than $500,000. There are certain restriction 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.

3. 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. Failure to file within this deadline results in a penalty which is calculated based on the taxes payable.

4. Federal Corporate taxes payable are due three months after the year end for those corporations that qualify for the small business deduction. In Quebec all corporate taxes are due two months after the year end. Interest will start to accumulate on any unpaid amounts after these deadlines (but no penalties until 6 months after the year end). 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.

5. The method of accounting for revenues and expenses is generally the same as if you were unincorporated. However instead of completing a T2125, you are required to fill out the General Index of Financial Information also referred to as the GIFI. This includes your profit and loss statement, a balance sheet and a notes section which is completed by the preparer of the tax return.

6. In order to file a Corporate tax return, you will need to ensure that you have a business number. This is the same as your payroll/deductions at source or GST/HST number, with a suffix that 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. The corporate tax number for Quebec businesses ends in IC000*

7. Corporate tax returns can be efiled directly through CRA My Business Account or by using approved tax software

8. Corporate tax instalments are usually based on prior year’s taxes payable and are usually due quarterly. Interest accumulates on unpaid amounts. If, however, you forecast that your taxable income will be lower in the current year vs the prior year, you can estimate reduce your instalments payable accordingly.

9. Most accountants use tax software to prepare income tax returns. Some of the more popular corporate tax software inlcude DT Max, ProFile and TaxPrep.

10. 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. 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.

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.

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