Common Questions About Corporate Tax & T2 Returns

Accounting income (what shows on your financial statements) and taxable income (what the CRA taxes) often don’t match. Your accountant has to make adjustments for things the CRA won’t allow—like meals and entertainment expenses (only 50% deductible) or amortization (which gets replaced by capital cost allowance on your tax return). Understanding these differences helps you plan your tax position accurately.

Your T2 return (corporate tax return) is due 6 months after your fiscal year-end, but if you want to avoid penalties on late or unpaid taxes, you should file within 2 months and pay within 2 months as well. Missing the 6-month deadline triggers automatic penalties, so mark your calendar and don’t rely on extensions.

You can deduct almost any reasonable business expense incurred to earn income—salaries, rent, utilities, office supplies, professional fees—but the CRA has strict rules on personal expenses and certain limits. For example, only 50% of meals and entertainment is deductible, vehicle expenses must be tracked carefully with a logbook, and home office deductions require detailed allocation. Keep receipts for everything.

If your corporation paid any dividends to shareholders during the year, you report them on a T5 slip (not the T2), which must be issued by March 31st. The T2 itself shows the corporation’s taxable income; shareholder payments are reported separately through T5s and Schedule 55.

Late filing penalties are 1% of unpaid tax per month (up to 12 months), plus interest compounded daily. If you miss the deadline for the second year in a row, the penalty jumps to 2% per month. Beyond penalties, the CRA may assess you without your return, issue arbitrary reassessments, or freeze your GST/HST credits. File on time—it’s not worth the risk.

Only 50% of capital gains are taxable income (the inclusion rate), and you report them on Schedule 8 of your T2. Capital losses can offset capital gains, and any excess loss carries back 3 years or forward indefinitely. If your corporation holds investments or sells equipment, tracking these transactions properly saves significant tax dollars.