Under the Income Tax Act, a corporation is required to file its tax return within six months of the end of a taxation year. The penalty for late filing is generally calculated as a percentage of the unpaid tax for the fiscal year. If no tax was payable for the year due to a loss, or because you overpaid your installments, late filing penalty is nil.
In “nil” situations you may not be in such a hurry to file your corporate return. But you should be, because tardiness can have unintended consequences.
Double Penalty for Repeated Late Filing
If you file late, you’ll pay a penalty. No big deal, you hope. But if you’re late again within the next three years, that penalty amount can double.
Risk of Minimum Penalty Applying
Non-resident corporations that do business in Canada face a minimum penalty of $25 per day to a maximum of 100 days for filing late, even if no taxes are owed. A foreign corporation once challenged this minimum penalty for non-resident corporations in the courts, arguing a deficiency in the rule’s drafting. The court surprisingly agreed and no penalty was payable under that rule. But then the court upheld the penalty as a separate rule and levied a penalty in the same amount for failing to comply with a duty or obligation under the Income Tax Act.
That goes to show “the CRA finds a way,” so don’t give them a reason to start looking into anything.
Three-Year Limitation on Issuing Refunds
Under the Income Tax Act, the CRA is only required to issue a corporate tax refund for a particular year within three years after the end of the taxation year. A refund could arise in even in a loss year if you made some installment payments or you paid a dividend that triggered a “dividend refund.” But if you delay filing your corporate return, you could lose the refund.
Six-Month Limitation on Loss Carryback Requests
The CRA is only required to reassess carryback of losses if the return for the loss year is filed within six months of the end of the taxation year. But if you file late your return for the loss year, the CRA may not accept your request to carry the loss back to an earlier year and to obtain a refund of tax for the earlier year.
In addition to a corporate income tax return, your corporation may also be required to file form T106: Information Return of Non-Arm’s Length Transactions with Non-Residents (due six months after the end of the taxation year) or form T1134: Information Return Relating To Controlled and Not-Controlled Foreign Affiliates (due 15 months after the end of the taxation year). Late filing penalties apply where these forms are not filed on time. They can easily be overlooked when you’re pressed for time and decide to file your income tax return late.
You’ll be in a much better position to claim refunds and avoid penalties if you file your corporate taxes on time. Contact your DMCL advisor for assistance and start early.