Avoiding penalties

If you do not comply with the requirements and regulations under the Income Tax Act, one or more of the following penalties may apply:

Sometimes, we will consider cancelling or waiving penalties and interest if the reason for filing late or not paying an amount when it is due may be beyond the taxpayer's control.

Failure to file penalties

If you file your return late, a penalty applies. The penalty is 5% of the unpaid tax that is due on the filing deadline, plus 1% of this unpaid tax for each complete month that the return is late, up to a maximum of 12 months.

The corporation will be charged an even larger penalty if we issued a demand to file the return and we assessed a failure to file penalty for the corporation in any of the three previous tax years. The penalty is 10% of the unpaid tax when the return was due, plus 2% of this unpaid tax for each complete month that the return is late, up to a maximum of 20 months.

References
Subsections 162(1), and 162(2) of the Income Tax Act.

Instalment penalty

When instalment interest is more than $1,000, we may charge an instalment penalty under section 163.1 of the Income Tax Act.

We calculate the penalty by subtracting from the instalment interest the greater of:

  • $1,000; and
  • 25% of the instalment interest calculated if no instalment payment had been made for the year.

One-half of the difference is the amount of the penalty.

See our example of how to calculate instalment interest and penalty.

Large corporations

A large corporation has to file:

If a corporation fails to file these returns, a penalty will be charged for each complete month that the returns are late, up to a maximum of 40 months. The penalty will be calculated as follows:

  • 0.0005% of the corporation's taxable capital employed in Canada at the end of tax year; and
  • 0.25% of the Part VI tax payable by the corporation (before the deductions in subsection 190.1(3)).

A corporation has to identify itself as a large corporation by answering yes to the question at line 233 on page 2 of the T2 return.

Note

A corporation is a large corporation if the total taxable capital employed in Canada at the end of the tax year by it and its related corporations is over $10 million.

To determine if the total taxable capital employed in Canada of the corporation and its related corporations is greater than $10,000,000, you can use whichever of the following schedules that applies:

A corporation with a permanent establishment in Newfoundland and Labrador that is a financial institution, as defined under provincial legislation, has to file Schedule 305, Newfoundland and Labrador Capital Tax on Financial Institutions.

Reference
Section 235 of the Income Tax Act

Not reporting income

We will charge a penalty if a corporation does not report an amount of income on its return for a tax year, and if it failed to report income in any of the three previous tax years. The penalty is 10% of the amount of unreported income in the year.

Reference
Subsection 163(1) of the Income Tax Act

False statements or omissions

We will charge a penalty if a corporation, either knowingly or under circumstances of gross negligence, makes a false statement or omission on a return. The penalty is the greater of either $100 or 50% of the amount of understated tax.

Note

If a corporation is charged a penalty for making a false statement or omission, the corporation cannot be charged a penalty on the same amount for failing to report income.

Reference
Subsections 163(1) and (2) of the Income Tax Act

Misrepresentation in tax matters by a third party

We will charge a penalty if a person:

  • counsels or assists another person in filing a false return; or
  • knowingly allows a taxpayer to submit false tax information.

Reference
Section 163.2 of the Income Tax Act

Non-resident corporations

A non-resident corporation will be subject to a failure to file penalty equal to the greater of:

  • $100; and
  • $25 for each complete day that the return is late, up to a maximum of 100 days.

This penalty applies if the amount calculated is more than the amount of penalty usually applied under subsections 162(1) and (2), as discussed in Failure to file penalties.

References
Subsection 162(2.1) of the Income Tax Act

Non-compliance with mandatory Internet filing

All corporations with annual gross revenue of more than $1 million have to Internet file their T2 return, except for insurance corporations, non-resident corporations, corporations reporting in functional currency and corporations that are exempt from tax payable under section 149 of the Income Tax Act.

The penalty for non-compliance is $1,000.

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