Filing a T2 for an inactive corporation: what you still owe

Why an inactive corporation still files

The CRA states that all corporations, including non-profit organizations, tax-exempt corporations and inactive corporations, have to file a T2 return for every tax year, even if there is no tax payable. The only exceptions it lists are tax-exempt Crown corporations, Hutterite colonies and corporations that were registered charities throughout the year. A dormant holding company or a business you have paused is not on that list.

The CRA also says you must keep filing until the corporation is dissolved by the body that governs it, which is the federal or provincial incorporating authority. Closing a bank account or telling customers you have stopped trading does not change the corporation’s legal existence.

What inactive means on the return

On the T2, line 280 asks whether the corporation is inactive. The CRA’s guide defines an inactive corporation as one that has not operated during the tax year. It is a question about the year, not a permanent label. A corporation that sold nothing for ten months and then started trading in November was not inactive for that year.

Be careful with the answer. A corporation that only holds investments, charges rent to a related party, earns interest or has a loan balance with a shareholder may have income or financial information to report even if there is no active business. Ask your accountant whether line 280 really applies before ticking it.

What to file and what you can skip

The CRA says corporations that were inactive throughout the year and have no balance sheet or income statement information to report do not have to attach schedules 100, 125 and 141. The schedules are still accepted if you file them. If the corporation is inactive but does have balance sheet or income statement information, that information still has to be reported, so the schedules are not skipped.

Other schedules may still apply depending on the corporation’s facts, such as shareholder or related-corporation information. The CRA also provides a shorter T2 Short Return for eligible corporations, and the T2 guide sets out who qualifies. The practical point is that an inactive return is not necessarily a blank one, so confirm with the accountant what the facts require.

Deadline and electronic filing

The T2 is due within six months of the end of the tax year. If the year ends on the last day of a month, the return is due on the last day of the sixth month after. For example, a March 31 year-end gives a September 30 deadline, and an August 31 year-end gives February 28. If the date falls on a weekend or CRA-recognized holiday, the next business day applies.

For tax years starting after 2023, all corporations have to file the T2 electronically, with exceptions such as insurance corporations, non-resident corporations, corporations reporting in functional currency and corporations exempt from tax under section 149 of the Income Tax Act. The CRA says it will charge a $1,000 penalty if a corporation required to file electronically does not. A paper return for an inactive corporation is therefore not a safe shortcut.

Late filing when nothing is owed

The CRA’s late-filing penalty is 5% of the unpaid tax due on the filing deadline, plus 1% of that unpaid tax for each complete month the return is late, up to 12 months. A higher rate of 10% plus 2% per month, up to 20 months, applies where the CRA has demanded a return and assessed a late-filing penalty in any of the three previous years. Because the penalty is based on unpaid tax, a corporation that owes nothing may see little or no dollar penalty.

That is not a reason to let returns pile up. Unfiled years can complicate dissolution, a clearance certificate, a sale of the shell, a bank or lender request, or your own eligibility for refunds, which the CRA says must be claimed within three years of the tax year end. The CRA may also demand the missing returns. Catching up is much easier when the records are fresh.

Other obligations that may keep running

The T2 is not the only filing. Under the CRA’s guidance on temporarily stopping a business, a GST/HST registrant must keep filing returns even when the income for the period is zero. If the corporation has a payroll account and stops operating temporarily, the CRA asks you to call it; otherwise it expects remittances and returns to continue. When a business ends, final remittances and T4 reporting come due quickly.

Instalments are usually not an issue: the CRA says no instalments are needed when tax payable is $3,000 or less for the current or previous year. Our guide on corporate filing versus payment and our article on how corporate instalments work cover the payment side. If the corporation is dormant but still holds cash or investments, read the guidance on passive investments inside a corporation.

Ending the corporation properly

If you do not expect to use the corporation again, the cleaner route is dissolution. The CRA says to apply to the government body that governs the corporation, then check Form RC145, Request to Close Business Number Program Accounts, to see whether you need to send it with a copy of the articles of dissolution. Without that, the CRA considers the corporation still exists and will expect a return, even if there is no tax payable.

The T2 asks at line 078 whether this is the final return up to dissolution. Before distributing property to shareholders, the CRA expects the person winding up the affairs to obtain a clearance certificate, using Form TX19. Without one, that person can be personally liable for unpaid amounts up to the value of the property distributed. Settle loans with shareholders, outstanding balances and refunds before you dissolve.

What to bring to your accountant

Bring the articles of incorporation, the year-end, a list of tax years not yet filed, bank statements for each period, any shareholder loan details, notices from the CRA, and a note of any GST/HST or payroll accounts still open. Ask whether the corporation really was inactive, whether any schedule is needed, whether dissolution makes sense, and what must be settled first.