T2 Corporation – Income Tax Guide – What's New

From: Canada Revenue Agency

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In this guide, we give you basic information on how to complete the T2 Corporation Income Tax Return. This return is used to calculate federal income tax and credits. Corporations that have a permanent establishment in any province or territory other than Quebec or Alberta also use this return to report provincial and/or territorial income taxes and credits. Corporations with a permanent establishment in Quebec or Alberta must file a separate provincial return.

What's new?

2019 federal, provincial, and territorial budgets

New items such as changes introduced in the 2019 federal and various provincial/territorial budgets are outlined in boxes in this guide. This guide may contain changes that had not yet become law at the time of publishing.

Character conversion transactions

A character conversion transaction is a transaction that artificially turns ordinary taxable income into a capital gain through the use of derivative contracts. In 2013, rules were introduced for derivative forward agreements. Certain commercial transactions (for example, merger and acquisition transactions) were excluded from these rules. But an alternative character conversion transaction has been developed to misuse this exception.

For transactions entered into after March 18, 2019, there is an additional qualification for the commercial transaction exception for purchase agreements.

This qualification will also apply after December 2019 to transactions that were entered into before March 19, 2019, including those that extended or renewed the terms of the agreement after March 18, 2019.

Cross-border share lending arrangements

For amounts paid or credited as securities lending arrangement (SLA) compensation payments after March 18, 2019, measures will ensure that the withholding tax consequences for non-resident lenders under an SLA would generally be the same as if they had continued to hold the lent securities. For example, the payments by a Canadian resident to a non-resident for shares issued by a Canadian resident corporation (lent share) will always be treated as dividends, and hence subject to withholding tax. This does not apply for amounts paid or credited as SLA compensation payments after March 18, 2019, and before October 2019, if they were made under a written arrangement entered into before March 19, 2019.

Transfer pricing measures

For tax years starting after March 18, 2019, new measures will clarify that the transfer pricing rules related to Part XVI.1 of the Income Tax Act are applied before any other provision of the Act. The current exceptions to the application of the transfer pricing rules regarding situations in which a Canadian resident corporation has an amount owing from, or extends a guarantee in respect of an amount owing by, a controlled foreign affiliate will continue to apply.

For tax years for which the normal reassessment period ends after March 18, 2019, an extended reassessment period will apply as a consequence of an arrangement or event relating to transfer pricing transactions involving a Canadian taxpayer and a non resident with whom the taxpayer does not deal at arm's length. This will allow the extended reassessment period to apply to a broader range of situations.

Electronic delivery of requirements for information

Starting January 1, 2020, the Canada Revenue Agency will be allowed to send requirements for information, including those for foreign based information, electronically to banks and credit unions, rather than delivering them in person or by registered or certified mail. Written consent of the bank or credit union will be required. See Requirements for information and compliance orders.

Foreign affiliates

The foreign affiliate dumping rules are intended to counter erosion of the tax base by preventing surplus from being stripped out of Canada without tax. For transactions that occur after March 18, 2019, the application of these rules is extended to corporations resident in Canada that are controlled by a non‑resident individual, a non‑resident trust or a group made up of any combination of non‑resident corporations, non-resident individuals, and non-resident trusts that do not deal with each other at arm's length.

For tax years starting in 2020, Form T1134, Information Return Relating to Controlled and Not-Controlled Foreign Affiliates, has to be filed within 12 months after the end of the corporation's tax year. For tax years starting after 2020, it will have to be filed within 10 months after the end of the corporation’s tax year. See Foreign affiliates.

Zero-emission vehicles

Capital cost allowance

Two new capital cost allowance (CCA) classes were added for zero-emission vehicles acquired after March 18, 2019. If such vehicles are acquired before 2028, an enhanced first year CCA is made available. See CCA rates and classes.

Other expenses

Other expenses related to zero-emission vehicles that are not claimed through CCA may be deductible, such as:

  • bad debts on dispositions (subsections 20(4) and (4.11))
  • interest on money borrowed (section 67.2)
  • amounts related to situations when there are more then one owner (section 67.41)
  • amounts related to transfer of a property to a corporation by a shareholder (paragraph 85(1)(e.5))
  • GST input tax credit and rebate (subsections 248 (17) and (17.1))

Cultural gifts

For donations made after March 18, 2019, property does not have to have a direct connection with Canada's cultural heritage in order to qualify for the enhanced tax incentives for donations of cultural property. See Line 313 – Cultural gifts.

Note 

This change also applies for the exception from capital gains tax for dispositions of cultural property under subparagraph 39(1)(a)(i.1).

Scientific Research and Experimental Development (SR&ED) Program

For tax years ending after March 18, 2019, taxable income is no longer a factor in determining a Canadian-controlled private corporation (CCPC) annual expenditure limit for the purpose of the refundable 35% enhanced SR&ED investment tax credit. Only the taxable capital employed in Canada remains a factor. See SR&ED investment tax credit and refund.

Small business deduction – Farming and fishing

For tax years starting after March 21, 2016, income from sales of the farming products or fishing catches by a CCPC's farming or fishing business to any type of arm's length purchaser corporation is excluded from specified corporate income and, as such, eligible for the small business deduction. See Specified farming or fishing income.

Canadian film or video production tax credit – Canadian Belgian co productions

Effective March 12, 2018, the memorandum of understanding between Canada and Belgium is added to the list of instruments under which a film or video production may be produced in order to qualify as a treaty co-production. This allows joint projects of producers from Canada and Belgium to qualify for the Canadian film or video production tax credit.

Support for Canadian journalism

The 2019 federal budget announced that, as of January 1, 2019, journalism organizations may ask for recognition as a qualified Canadian journalism organization (QCJO). This status is a necessary condition to qualify for each of the following measures:

  • a new qualified donee status
  • a refundable labour tax credit
  • a non-refundable tax credit for Canadian digital news media subscriptions (only available to individual taxpayers)

See Line 798 – Canadian journalism labour tax credit.

A QCJO may be a corporation, a partnership, or a trust. For a corporation to be recognized as a QCJO at any particular time for purposes of the Income Tax Act, it will have to meet the following criteria:

  • it must be incorporated under the laws of Canada or of a province
  • the chairperson or other presiding officer, and at least ¾ of the directors or other similar officers of the corporation, are citizens of Canada
  • it is resident in Canada
  • it operates in Canada, including that its content is edited, designed and, except for digital content, published in Canad
  • it is primarily engaged in the production of original news content which must be primarily focused on matters of general interest and reports of current events, including coverage of democratic institutions and processes, but must not be primarily focused on a particular topic such as industry-specific news, sports, recreation, arts, lifestyle or entertainment
  • it regularly employs two or more journalists who deal at arm's length with the organization in the production of its content
  • it cannot be significantly engaged in producing content that promotes the interests, or reports on the activities, of an organization, an association or its members, for a government, Crown corporation or government agency, or to promote goods or services
  • it cannot be a Crown corporation, municipal corporation or government agency
  • it is designated at that time by the minister of National Revenue taking into account any recommendations of a body prescribed for the QCJO definition

Qualified donee status

  • As of January 1, 2020, there will be a new category of qualified donee called a registered journalism organization (RJO). RJOs will have similar benefits as registered charities, such as being exempt from income tax and being able to issue donation receipts. RJOs will also have to comply with requirements similar to those of registered charities in order to maintain their status as qualified donees. See Line 311 – Charitable donations.

To be an RJO, an organization must meet the following criteria:

  • it applied to the minister of National Revenue in prescribed form for registration, it was accepted for registration, and its registration has not been revoked
  • it is a corporation or a trust
  • it is a qualified Canadian journalism organization, as defined in subsection 248(1)
  • it is constituted and operated only for journalism
  • any business activities it carries on are related to journalism
  • it has trustees or a board of directors, each of whom deal at arm's length from each other
  • it is not controlled, directly or indirectly, by a person or group of persons that do not deal with each other at arm's length
  • except in specific situations, in any one tax year, it cannot accept gifts from any single source that represent more than 20% of its total revenues (including donations)
  • it cannot pay any part of its income to, or otherwise make available for the personal benefit of, a proprietor, member, shareholder, director, trustee, settlor or like individual

Refundable labour tax credit

As of January 1, 2019, a 25% refundable labour tax credit is available to a qualifying journalism organization (QJO). Such an organization is a QCJO that meets certain criteria. The maximum credit available is $13,750 per eligible newsroom employee per year for qualifying labour expenditures. An RJO (which is exempt from income tax) may also be entitled to this tax credit for its qualifying labour expenditures as long as certain criteria are met. See Line 798 – Canadian journalism labour tax credit.

Newfoundland and Labrador film and video industry tax credit

This credit, which was scheduled to end December 31, 2018, has been extended three years to December 31, 2021. See Newfoundland and Labrador film and video industry tax credit.

Lower rate of Prince Edward Island corporation income tax

Effective January 1, 2020, the Prince Edward Island lower rate of corporation income tax decreases from 3.5% to 3%. See Prince Edward Island.

Prince Edward Island political contribution tax credit

This credit is only available for contributions made before June 12, 2018. See Prince Edward Island political contribution tax credit.

Nova Scotia innovation equity tax credit

Effective April 1, 2019, this credit is made available to corporations that make eligible investments in eligible Nova Scotia small or medium sized corporations engaged in innovative activities. The credit is equal to 15% of the eligible investment that a corporation makes in another approved corporation. The minimum investment amount is $50,000 and the maximum investment amount is $500,000. Previously, the credit was available only to individual investors. See Nova Scotia innovation equity tax credit.

Nova Scotia venture capital tax credit

Effective April 1, 2019, Nova Scotia introduced a new venture capital tax credit available to individuals and corporations who make eligible investments in a qualifying venture capital fund. The credit rate is 15%. See Nova Scotia venture capital tax credit.

Lower rate of Ontario corporation income tax

Effective January 1, 2020, the Ontario lower rate of corporation income tax decreases from 3.5% to 3.2%. See Ontario small business deduction.

Ontario interactive digital media tax credit

For tax years starting after April 11, 2019, the minimum Ontario labour expenses that a specialized digital game corporation must incur in its tax year for eligible digital games is decreased from $1 million to $500,000. See Ontario interactive digital media tax credit.

Manitoba manufacturing investment tax credit

For qualifying property acquired after June 30, 2019, the refundable part of this credit is reduced from 8% to 7% of the cost of the property. See Manitoba manufacturing investment tax credit.

Manitoba small business venture capital tax credit

This credit, which was scheduled to end December 31, 2019, has been extended three years to December 31, 2022. See Manitoba small business venture capital tax credit.

Manitoba cultural industries printing tax credit

This credit, which was scheduled to end December 31, 2019, has been extended one year to December 31, 2020. For tax years ending after March 6, 2019, the annual maximum credit that can be claimed is set at $1.1 million per corporation. See Manitoba cultural industries printing tax credit.

Manitoba book publishing tax credit

This credit, which was scheduled to end December 31, 2019, has been extended five years to December 31, 2024. See Manitoba book publishing tax credit.

Manitoba film and video production tax credit

This credit, which was scheduled to end December 31, 2019, has been made permanent. See Manitoba film and video production tax credit.

British Columbia political contribution tax credit

This credit is only available for contributions made before November 30, 2017. See British Columbia political contribution tax credit.

British Columbia farmers’ food donation tax credit

This credit, which was scheduled to end December 31, 2019, has been extended one year to December 31, 2020. See British Columbia farmers’ food donation tax credit.

British Columbia small business venture capital tax credit

As of March 2, 2019, a convertible right investment in an eligible business corporation is eligible for a tax credit. See British Columbia small business venture capital tax credit.

British Columbia mining exploration tax credit

This credit, which was scheduled to end December 31, 2019, has been made permanent. See British Columbia mining exploration tax credit.

British Columbia training tax credit

This credit, which was scheduled to end December 31, 2018, has been extended one year to December 31, 2019. See British Columbia training tax credit.

British Columbia shipbuilding and ship repair industry tax credit

This credit, which was scheduled to end December 31, 2019, has been extended three years to December 31, 2022. See British Columbia shipbuilding and ship repair industry tax credit.

Yukon research and development tax credit

Yukon will establish the Yukon University, in part by continuing the Yukon College as the Yukon University. Currently, the Yukon research and development tax credit is enhanced for expenditures paid or payable to the Yukon College. See Yukon research and development tax credit.

Yukon carbon rebate

Since July 1, 2019, the federal carbon levy is applied to fuels purchased in Yukon. Yukon’s Carbon Rebate Program will return all carbon levy revenues back to individuals, businesses, First Nations governments, and municipal governments. The Canada Revenue Agency administers parts of this program in the form of rebates. See Yukon carbon rebate.

Lower rate of Nunavut income tax

Effective July 1, 2019, the Nunavut lower rate of income tax decreased from 4% to 3%. See Nunavut.

 

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