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

Economic and Fiscal Update 2021

Small businesses air quality improvement tax credit

For eligible expenses incurred between September 1, 2021, and December 31, 2022, the government introduced the new small businesses air quality improvement tax credit. The credit is equal to 25% of eligible expenses related to the purchase or upgrade of mechanical heating, ventilation, and air conditioning (HVAC) systems and the purchase of standalone devices designed to filter air using high efficiency particulate air filters (HEPA), up to $10,000 per location and $50,000 in total.

Return of fuel charge proceeds to farmers tax credit

Beginning in the 2021-2022 fuel charge year, the government introduced a refundable tax credit as a means to return fuel charge proceeds under the federal carbon pollution pricing system directly to eligible farming businesses that incur total farming expenses of $25,000 or more, all or a portion of which are attributable to provinces that do not currently meet the federal stringency requirements, that is, the following designated provinces: Ontario, Manitoba, Saskatchewan and Alberta. The credit for an applicable fuel charge year is equal to eligible farming expenses attributable to the designated provinces in the calendar year when the fuel charge year starts, multiplied by a payment rate, as specified by the minister of Finance for the fuel charge year. Businesses can claim these credits through their tax returns that include the 2021 and 2022 calendar years.

Federal, provincial, and territorial budgets for 2021

New items in this guide are outlined in boxes. These include changes introduced in the 2021 federal, provincial or territorial budgets. This guide may contain changes that had not yet become law at the time of publishing.

COVID-19 support programs

For information on all support programs related to COVID-19, go to COVID-19: Financial support for people, businesses and organizations.

The following subsidies were set up as financial support during the COVID-19 pandemic. They are taxable. You have to report the total amount as income in the year in which you received the subsidy.

Tourism and Hospitality Recovery Program (THRP)

Beginning October 24, 2021, the THRP provides targeted wage and rent support at a maximum subsidy rate of 75% (reduced by half to 37.5% beginning March 13, 2022) to eligible businesses, charities, and non-profits in the tourism or hospitality sector or those affected by a qualifying public health restriction.

Hardest-Hit Business Recovery Program (HHBRP)

Beginning October 24, 2021, the HHBRP provides targeted wage and rent support at a maximum subsidy rate of 50% (reduced by half to 25% beginning March 13, 2022) to eligible businesses, charities, and non-profits outside of the tourism or hospitality sector that have been deeply affected since the start of the pandemic.

Canada Recovery Hiring Program (CRHP)

Beginning June 6, 2021, the CRHP provides eligible employers with a subsidy of up to 50% of the increase in eligible remuneration paid to eligible employees during the claim period, compared to the remuneration paid during the base period. If you are eligible for both the CRHP and wage support through one of the other subsidies, apply for the subsidy that gives you the higher amount.

Other COVID-19 support programs

  • Beginning October 24, 2021, the Local Lockdown Program provides the means for eligible businesses, charities, and non-profits that are faced with certain public health restrictions to qualify for wage or rent support through the THRP, even if they are not in the tourism or hospitality sector.
  • The Canada Emergency Wage Subsidy (CEWS) provided a subsidy for each eligible employee on up to $1,129 of their eligible remuneration paid per week in a claim period by an eligible employer.
  • The Canada Emergency Rent Subsidy (CERS) provided a subsidy on up to $75,000 of eligible rent expenses per qualifying property (to a maximum of $300,000 for all properties) paid per claim period by an eligible entity. It also provided an additional lockdown support top-up subsidy of up to 25% of eligible rent expenses for a qualifying property where an entity’s ordinary activities at that property were required to cease due to a public health order.

The CEWS and the CERS ended effective October 23, 2021, but you may continue to apply for any claim periods that are still open for application.

Publicly listed corporations may have to repay some or all of the wage subsidy amounts they received through the CEWS, THRP, or HHBRP after June 5, 2021, if the total compensation for certain executives in either the 2021 or 2022 calendar year exceeds the total compensation in the 2019 calendar year.

For more information on these COVID-19 support programs, see the details on Wage and rent subsidies.

Avoidance of tax debts

The Act contains an anti-avoidance rule that is intended to prevent corporations from avoiding their tax liabilities by transferring their assets to non-arm's length persons for insufficient consideration. Some corporations are engaging in complex transactions that try to circumvent this rule.

For transfers of property that occur after April 18, 2021, the budget proposed to enhance this rule with measures regarding:

  • the deferral of tax debts
  • the avoidance of non-arm's length status
  • the valuations of the property transferred and the consideration given for the property

The budget also proposed a penalty for planners and promoters of tax debt avoidance schemes. The penalty would be equal to the lesser of:

  • 50% of the tax that is attempted to be avoided
  • $100,000, plus the promoter's or planner's compensation for the scheme

Base erosion and profit shifting (BEPS)

The budget proposed to implement the best practices recommended by the Organisation for Economic Co-operation and Development and the Group of 20 in the BEPS Action Plan, on interest deductibility limitations and hybrid mismatch arrangements.

Interest deductibility limitations

A new rule would limit the net interest expense that a corporation may deduct in calculating its taxable income to no more than a fixed ratio of tax EBITDA. Tax EBITDA is the corporation's taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization, as determined for tax purposes.

Interest expense and interest income would include not only amounts that are legally interest, but also certain payments that are economically equivalent to interest, and other financing-related expenses and income.

The rule would be phased in, with a fixed ratio of 40% of tax EBITDA for tax years starting on or after January 1, 2023, and before January 1, 2024 (the transition year) and 30% for tax years starting on or after January 1, 2024. The rule would not apply to either Canadian controlled private corporations that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million, or to groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less.

Interest expense and interest income related to debts owing between Canadian members of a corporate group would generally be excluded. Under certain conditions, interest denied under the earnings-stripping rule could be carried forward for up to 20 years or back for up to 3 years.

Hybrid mismatch arrangements

Hybrid mismatch arrangements are cross-border tax avoidance structures that exploit differences in the income tax treatment of business entities or financial instruments under the laws of two or more countries to produce mismatches in tax results.

The two main forms of hybrid mismatch arrangements addressed by the BEPS Action Plan are deduction/non-inclusion mismatches and double deduction mismatches. There are existing Canadian income tax rules that can be used to challenge certain hybrid arrangements. The new measures would provide certainty by adopting a common approach for all such arrangements. Payments made by Canadian residents would not be deductible for Canadian income tax purposes when they give rise to a further deduction in another country or are not included in the ordinary income of a non-resident recipient. Conversely, when a payment made under such a mismatch arrangement by an entity that is not resident in Canada is deductible for foreign income tax purposes, no deduction for the payment would be permitted against the income of a Canadian resident. Any amount of the payment received by a Canadian resident would also be included in income, and, if the payment is a dividend, it would not be eligible for the deduction otherwise available for certain dividends received from foreign affiliates.

Other rules such as those on branch mismatch arrangements, imported mismatch arrangements and reverse hybrids would be introduced to the extent relevant and appropriate in the Canadian context.

Rules to neutralize hybrid mismatch arrangements would be introduced in two steps: a first set of rules would apply as of July 1, 2022, and a second set no earlier than 2023.

Signature for Form T183CORP

As of the date of royal assent, signatures may be electronic on Form T183CORP, Information Return for Corporations Filing Electronically. See Using tax preparation software.

Mandatory Internet filing threshold

All corporations with annual gross revenue of more than $1 million have to file their T2 return electronically, with some exceptions. The budget proposed to eliminate this threshold for tax years starting after 2021. Most corporations would have to file their return electronically. See Mandatory Internet filing.

Mandatory electronic payments

For payments made after 2021, the budget proposed that remittances over $10,000 be made electronically. See When and how to pay income tax.

Mandatory disclosure rules

Effective in 2022, it was proposed that the existing reportable transaction rules be strengthened and that new requirements be introduced:

  • to report notifiable transactions
  • for specified corporations to report uncertain tax treatments

The budget proposed new penalties for each failure to meet these reporting requirements. See Information reporting of tax avoidance transactions.

Country-by-country reporting

Beginning on October 1, 2021, Canadian corporations required to file Form RC4649, Country‑by‑Country Report, must do so electronically. See Country-by-country reporting

Electronic correspondence from the CRA

Effective on the date of royal assent, the default method of correspondence for businesses that use the Canada Revenue Agency's My Business Account portal will be changed to electronic. See Signing up for email notifications when filing your T2 return.

Employee stock option – Employer deduction for non-qualified securities

Canada's tax treatment of employee stock options granted after June 30, 2021, applies a $200,000 annual limit in a calendar year on employee stock option grants that can receive preferred tax treatment. Generally, the employee stock option benefits will remain uncapped for non-Canadian-controlled private corporation employers with annual gross revenue of $500 million or less and Canadian-controlled private corporations.

For employee stock options of more than the $200,000 limit, the employer subject to the new rules would be entitled to an income tax deduction for the stock option benefit included in the employee's income. See Line 352 – Employer deduction for non-qualified securities.

Capital cost allowance (CCA)

CCA for clean energy equipment

To support investment in clean technologies, under proposed legislative changes:

  • CCA classes 43.1 and 43.2 would be expanded for new types of property that are acquired and become available for use after April 18, 2021
  • access to classes 43.1 and 43.2 would be restricted for certain fossil-fuelled and low efficiency waste-fuelled electrical generation equipment that become available for use after 2024

See CCA for clean energy equipment (classes 43.1 and 43.2).

Immediate expensing for CCPCs

In addition to the enhanced CCA deductions available under existing rules, such as the full expensing for classes 43.1, 43.2, and 53, the budget proposed to provide temporary immediate expensing for certain property acquired by a Canadian-controlled private corporation. This would apply to eligible property that is acquired after April 18, 2021, and that becomes available for use before 2024. It would be limited to a maximum of $1.5 million per tax year. See Immediate expensing for CCPCs.

Note

As of December 31, 2021, the legislation for this proposed measure had not been released. The CRA will only allow these claims once the legislation is introduced.

Rate reduction for zero-emission technology manufacturers

A temporary measure to reduce the corporate tax rates on manufacturers of qualifying zero-emission technology has been proposed for tax years starting after 2021. Income that would otherwise be subject to the 15% general corporate rate would now be taxed at a 7.5% rate, and income that would otherwise be taxed at the 9% small-business rate would be reduced to 4.5%. The reduced rates would be gradually phased out starting in tax years that begin in 2029 and fully phased out for tax years that begin after 2031. See Line 616 – Manufacturing and processing profits deduction.

Canadian film or video production tax credit

For productions for which eligible expenditures were incurred in tax years ending in 2020 or 2021, due to COVID-19, the budget proposed a 12-month temporary extension for:

  • the determination of the production starting time
  • the deadline for submitting the certificate of completion
  • the deadline to show the production in Canada under a written agreement

See Line 796 – Canadian film or video production tax credit.

Film or video production services tax credit

For productions for which eligible expenditures were incurred in tax years ending in 2020 or 2021, due to COVID-19, the budget proposed a 12-month temporary extension to the period in which the aggregate expenditure threshold must be met. See Line 797 – Film or video production services tax credit.

Direct deposit request

You can no longer start direct deposit nor update your banking information when filing your T2 return. Lines 910, 914, and 918 were removed from the T2 return. See Direct deposit request.

Newfoundland and Labrador film and video industry tax credit

Effective July 1, 2021, the maximum tax credit that may be earned within a 12-month period is increased from $4 million to $5 million. See Newfoundland and Labrador film and video industry tax credit.

Lower rate of Prince Edward Island corporation income tax

Effective January 1, 2022, the Prince Edward Island lower rate of corporation income tax decreases from 2% to 1%. See Prince Edward Island.

Ontario regional opportunities investment tax credit

The credit rate is temporarily doubled to 20% from 10%. This applies to property that becomes available for use in the corporation's tax year, in the period beginning on March 24, 2021, and ending before January 1, 2023. See Ontario regional opportunities investment tax credit.

Ontario Ministry of Government and Consumer Services annual return

As of May 15, 2021, you can no longer file the Ontario Corporations Information Act annual returns, forms T2SCH546 and T2SCH548, with the Canada Revenue Agency.  See Ontario Ministry of Government and Consumer Services annual return.

Manitoba small business venture tax credit

For tax years ending after April 6, 2021, the credit is enhanced by increasing:

  • the maximum eligible investment by an investor from $450,000 to $500,000
  • the maximum annual tax credit that can be claimed from $67,500 to $120,000

See Manitoba small business venture tax credit.

Manitoba cultural industries printing tax credit

This credit, which was scheduled to end December 31, 2021, has been extended three years to December 31, 2024. See Manitoba cultural industries printing tax credit.

Manitoba interactive digital media tax credit

This credit, which was scheduled to end December 31, 2022 has been made permanent.

Effective April 7, 2021, the eligible activities for this tax credit include add-on digital media and content that is developed, or provided, mainly for commercial use, and is complementary to the main product being developed, such as:

  • downloadable content
  • on-going maintenance and updates
  • data management and analysis

See Manitoba interactive digital media tax credit.

Manitoba book publishing tax credit

This credit, which was scheduled to end December 31, 2024, has been made permanent. See Manitoba book publishing tax credit.

Manitoba film and video production tax credit

The 10% frequent filming bonus is temporarily paused for two years due to COVID-19. The time period continues as normal for production companies that have continued to produce. See Manitoba film and video production tax credit.

Manitoba community enterprise development tax credit

This credit, which was scheduled to end December 31, 2021, has been extended one year to December 31, 2022. See Manitoba community enterprise development tax credit.

British Columbia book publishing tax credit

This credit, which was scheduled to end March 31, 2021, has been extended five years to March 31, 2026. See British Columbia book publishing tax credit.

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