If you do not comply with the requirements and regulations under the Income Tax Act, one or more of the following penalties may apply:
- failure to file penalties
- instalment penalty
- penalty to large corporations
- penalty for not reporting income
- penalty for false statements or omissions
- penalty for misrepresentation in tax matters by a third party
- penalty to non-resident corporations
- penalty for non-compliance with mandatory Internet filing
- other penalties
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 under subsection 150(2) 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.
Subsections 162(1) and 162(2) of the Income Tax Act
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 either:
- 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.
A large corporation has to file:
- T2 Corporation Income Tax Return
- Schedule 38, Part VI Tax on Capital of Financial Institutions, if applicable
If a corporation fails to file these returns, in addition to any other penalty as applicable, 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 by adding the following:
- 0.0005% of the corporation's taxable capital employed in Canada at the end of tax year
- 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.
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.
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 equal to or greater than $500 that is required to be included on its return for a tax year, and if it failed to report income in any of the three previous tax years.
This penalty will not be applied if the corporation is liable under subsection 163(2) for the same unreported amount.
The repeated failure to report income penalty is equal to the lesser of:
- 10% of the amount of unreported income in the year
- 50% of the difference between the understated tax payable (and certain overstated refundable tax credits) related to the amount you failed to report and the amount of tax withheld related to the amount you failed to report.
Subsections 163(1) and 163(1.1) 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.
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.
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
- knowingly allows a taxpayer to submit false tax information
Information Circular IC01-1, Third-Party Civil Penalities
Section 163.2 of the Income Tax Act
A non-resident corporation will be subject to a failure to file penalty equal to the greater of either:
- $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.
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 electronically 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.
We can also charge penalties to a corporation for late or incomplete instalment payments and for not providing information on an authorized or prescribed form. The most common forms are:
- Form T106, Information Return of Non-Arm's Length Transactions with Non-Residents
- T5013 SUM, Summary of Partnership Income, and T5013 FIN, Partnership Financial Return
- T5018, Statement of Contract Payments
- Form T1134, Information Return Relating to Controlled and Not-Controlled Foreign Affiliates
- Form T1135, Foreign Income Verification Statement
- Form T1141, Information Return in Respect of Contributions to Non-Resident Trusts, Arrangements or Entities
- Form T1142, Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust
- T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim
Sections 162 and 163.1 of the Income Tax Act
Forms and publications
- Guide T4012, T2 Corporation – Income Tax Guide
- Guide T7B-CORP, Corporation Instalment Guide
- T2 Corporation Income Tax Return
- Information Circular IC01-1, Third-Party Civil Penalties
- Schedule 33, Taxable Capital Employed in Canada – Large Corporations
- Schedule 34, Taxable Capital Employed in Canada – Financial Institutions
- Schedule 35, Taxable Capital Employed in Canada – Large Insurance Corporations
- Schedule 38, Part VI Tax on Capital of Financial Institutions
- Schedule 305, Newfoundland and Labrador Capital Tax on Financial Institutions
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