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:

• 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 electronic filing
• other penalties

Sometimes, the CRA 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 the CRA issued a demand to file the return under subsection 150(2) and the CRA 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 either:

• $1,000
• 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:

• 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))

To identify the corporation as a large corporation, answer yes to the question at line 233 on page 2 of the T2 return.

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.

A corporation with a permanent establishment in Nova Scotia at any time in the tax year that is a financial institution, as defined under provincial legislation, has to file Schedule 352, Nova Scotia Financial Institutions Capital Tax.

Reference
Section 235 of the Income Tax Act

Not reporting income

The CRA will charge a penalty if a corporation does not report an amount equal to or greater than $500 that is required to be included in computing its income on its return in a tax year and 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 you did not report on your return for tax year
• 50% of the difference between the understated tax payable (and certain overstated refundable tax credits) related to the amount you did not report and the amount of tax withheld related to the amount you did not report.

Reference
Subsections 163(1) and 163(1.1) of the Income Tax Act

False statements or omissions

The CRA 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.

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

Misrepresentation in tax matters by a third party

The CRA will charge a penalty if a person:

• advises or helps another person to file a false return
• knowingly allows a taxpayer to submit false tax information

References
Information Circular IC01-1, Third-Party Civil Penalities
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
• $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 electronic filing

All corporations with annual gross revenue of more than $1 million have to file their T2 return electronically, 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.

This $1 million threshold is eliminated for tax years starting after 2023. Most corporations have to file their return electronically. 

Corporations are subject to a penalty for non-compliant returns.

References
Subsection 150.(2.1)
Regulation 205.1(2)

Other penalties

The CRA can also charge penalties 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 FIN, Partnership Financial Return, and T5013 SUM, Information Slips Summury
• T5018 SUM, Summury 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

References
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
• Schedule 352, Nova Scotia Financial Institutions Capital Tax