Dormant Corporation Never Filed a T2: Penalty, Catch Up or Close

Do I have to file a T2 if the corporation never earned anything?

Yes, generally. A corporation resident in Canada files a T2 for every tax year, within six months after year-end, even with no income and no tax payable. The CRA lists inactive corporations among those that must file; its only exceptions are tax-exempt Crown corporations, Hutterite colonies and corporations that were registered charities all year (CRA: T2 guide; Income Tax Act, s. 150(1)).

The duty belongs to the corporation. The Act requires the return without any notice or demand, so it does not wait for a CRA letter, and it does not depend on the corporation having earned money. Canadian incorporation after April 26, 1965 makes a corporation resident here for tax, wherever its owner lives, unless a tax treaty places it in the other country (Income Tax Act, s. 250). The usual late-filing penalty is a percentage of unpaid tax, so a year with no tax unpaid gives it no base; a flat penalty is the one open question, covered below.

A dormant corporation is more likely a straightforward catch-up when no CRA letter or demand has arrived, the registry still shows it active, and it never held a GST/HST or payroll account. It may need professional judgment when any of these is true:

• the CRA has sent a letter or demand to file;
• money moved in or out: share capital, a shareholder loan, bank fees, interest;
• you cannot say whether any income, GST/HST or payroll was ever reported;
• the registry may already have dissolved it;
• you plan to sell, borrow against or restart it.

Gather before anything is filed:

• the incorporation certificate and date, and the year-end the CRA has on file;
• the business number, and access to the corporation's CRA My Business Account or an authorized representative;
• bank statements from the day the account opened;
• the share structure and any money put in or taken out;
• every CRA letter, and the corporation's registry status.

Am I in trouble if my corporation never filed, and what does the CRA do first?

Not filing breaks the Act, but the CRA's non-filer process begins by asking for the return. It may send a letter or notice, follow with a call that sets a filing deadline, and then visit in person (CRA: unfiled tax returns). A demand under subsection 150(2) applies whether or not any tax is payable, and it states the time allowed.

If no return arrives, the CRA says it may assess tax owing without one, leaving out voluntary deductions you may have been eligible for, and may charge penalties and interest. It lists prosecution last, after other efforts fail. The Act makes failing to file when required an offence; on summary conviction the fine is $1,000 to $25,000, or both that fine and up to 12 months in prison (Income Tax Act, s. 238(1)). When a corporation commits an offence, an officer, director or agent who directed, authorized, assented to, acquiesced in or participated in it is a party to the offence too (s. 242).

Filing the real return matters because an assessment made without one is an estimate. When a return is filed for a year the CRA has already assessed, the CRA reviews it and reassesses (CRA: unfiled tax returns). An estimate can also be disputed, but a notice of objection is a separate written document, due 90 days after the assessment notice is sent (s. 165(1); see reviews, audits and voluntary disclosure).

What is the T2 late-filing penalty when there is no income?

For a corporation with no tax unpaid, the percentage penalties have nothing to apply to. The open question is the flat penalty in s. 162(7): the statute excludes it where another provision already sets a penalty for the failure, s. 162(1) sets one for a late return, and the CRA's published pages do not say how it treats a late nil T2.

The ordinary percentage penalty is 5% of the tax unpaid on the due date, plus 1% of that tax for each complete month late, up to 12 months (Income Tax Act, s. 162(1); CRA: avoiding penalties).

The larger repeat penalty, 10% plus 2% a month for up to 20 months, needs a CRA demand for the return and a penalty already payable under s. 162(1) or 162(2) for one of the previous three tax years. It is also a percentage of unpaid tax (s. 162(2)).

"No income" is not always "no tax." Interest or other income on a bank balance can create tax payable, and the percentages then apply to whatever was unpaid.

Other charges do not depend on unpaid tax:

Once a late return is filed, its notice of assessment shows which charge, if any, the CRA applied. How a penalty on a nil year is worked out and challenged is in penalties, interest and relief.

How many years do I file, and in what order?

File one T2 for every tax year since incorporation, oldest first. The Act requires a return for each tax year and sets no cut-off, and the CRA's non-filer page gives no number of years. A demand names the years it covers.

A corporation's first tax year starts on its incorporation date, no tax year can exceed 53 weeks, and each year starts the day after the previous one ends (CRA: T2 guide, chapter 1). The count therefore runs without gaps from incorporation to the latest year-end. For how a year-end is set or changed, see choosing or changing a year-end.

1. Confirm the incorporation date, the registry status and the year-end the CRA has on file. My Business Account shows outstanding returns and T2 return status. If no year-end is on file, settle it before filing, because every year's dates follow from it.
2. Settle what happened in each year: income, bank activity, GST/HST, payroll.
3. File the oldest year first. Each year's closing balances (share capital, loans, deficit) are the next year's opening balances.
4. Check how each year may be filed. The CRA states the electronic filing rule for tax years starting after 2023, and its internet filing service lists returns it cannot accept.
5. Match each notice of assessment to the year filed.

What do I file for a no-income year?

A T2 return for the year. An inactive corporation does not have to attach Schedules 100, 125 and 141 (the CRA's standard financial statement lines, GIFI), but only if it was inactive throughout the year and has no balance sheet or income statement information to report. The CRA accepts them if filed (CRA: T2 guide, chapter 2). Once the corporation has a bank balance, share capital, a loan, fees or interest to report, attach them. The exemption names only those three schedules: a corporation's first return also asks for Schedule 101, the opening balance sheet, and for Schedule 24 (CRA: T2 guide, chapter 2; chapter 1, line 070).

A private corporation with a shareholder holding 10% or more of its common or preferred shares also files Schedule 50, and one related to or associated with another corporation files Schedule 9. Preparing the return, and a balance sheet that balances when shares and a shareholder loan are involved, is covered in the nil corporate return and balance sheet.

Do GST/HST, payroll or registry annual returns also pile up?

Only the ones the corporation registered for or is bound by. A T2 does not file any of them. For the full list of what a no-income business files, see which returns your business files.

The CRA administers provincial corporate tax everywhere except Quebec and Alberta (CRA), so a corporation located in Quebec or Alberta may also owe a separate provincial return; the nil corporate return guide covers it.

If no GST/HST or payroll account was ever opened, there may be nothing to catch up on those accounts; an open payroll account can still call for nil remittances when no wages were paid. Confirm that against each program account (GST/HST, payroll, corporation income tax) in My Business Account, or ask the CRA; a Quebec GST/HST account is on Revenu Québec's site instead. Nil GST/HST returns never filed are covered in missed nil GST/HST returns.

The registry and the CRA are separate. An annual return is not the corporation's tax return (Corporations Canada), so registry good standing says nothing about the T2s. Missing registry returns can also end the corporation: Corporations Canada says the law allows dissolving a federal corporation for non-filing after one year and its policy is two, with a final notice giving 120 more days (Corporations Canada). Check the status first. If the corporation is already dissolved, see reviving a dissolved corporation.

Should I file everything or dissolve, and what does dissolving need?

It depends on whether the corporation will be used again. Keeping a federal corporation costs the $12 online annual return plus a T2 every year. Dissolving does not erase the missing years: nothing in the CRA's T2 guide says it cancels them, and the CRA treats a corporation as still existing, and expects returns, until it is sent the articles of dissolution (CRA: T2 guide, chapter 1).

A federal corporation with no property or liabilities can apply online for a certificate of dissolution with no filing fee, once its shareholders approve by a formal vote called a special resolution (its directors, if no shares were issued). One with property or liabilities must first distribute the property and discharge the liabilities. A bankrupt corporation cannot use this route (Corporations Canada). A provincial corporation dissolves through its own province's registry; Ontario lists dissolution as an Ontario Business Registry service (Ontario). Steps and rules differ by province.

The CRA side is separate. The T2 for the year ending on the date of dissolution is the final return, filed once the corporation has dissolved. The CRA's T2 guide tells a dissolved corporation to check Form RC145 (request to close business number program accounts) and send the CRA the articles of dissolution (CRA: T2 guide, chapter 1). A liquidator or anyone else winding up the corporation must also file any return it missed (s. 150(3)).

Before any property is distributed, the person winding the corporation up needs a CRA clearance certificate. That can be a director or officer, not only a named liquidator. One who distributes without it is personally liable for the corporation's unpaid amounts, up to the value distributed, and the CRA can assess that liability at any time (s. 159(2) and (3); CRA: IC82-6). The CRA asks for the notice of assessment of the final T2 with the request, yet that return follows dissolution and Corporations Canada requires property to be distributed first. Settle that sequence before moving any money.

The federal dissolution guide does not mention tax returns, so a certificate of dissolution does not show the T2s are filed. For the full order of steps and the clearance sequence, see closing a corporation.

Can penalties be cancelled, and when does a voluntary disclosure help?

With no unpaid tax there may be no penalty to cancel. If a penalty or interest was charged, the CRA may cancel or waive it at its discretion; meeting its listed criteria does not guarantee relief (CRA). The CRA's relief window looks back 10 calendar years from the year of the request (CRA). See penalties, interest and relief.

The Voluntary Disclosures Program needs a voluntary and complete application that involves interest, a penalty or both, for information at least one year past its filing due date (for GST/HST, one reporting period). An application relating to returns with no taxes or penalties owing is not eligible, so a purely nil catch-up generally gains nothing from it. It is worth examining if the corporation did earn income, charge GST/HST or pay wages that were never reported. An application is not voluntary once an audit or investigation of the information being disclosed has begun, against the corporation or a related taxpayer. A CRA letter about a specific compliance issue can instead make an otherwise eligible application prompted, which earns partial relief (CRA: IC00-1R7). If the CRA has already made contact, the order of steps matters. See reviews, audits and voluntary disclosure.

What if I want to restart or sell the corporation later?

Unfiled years stay with the corporation, so settle them first. The filing duty is the corporation's (s. 150(1)), so a change of owners does not remove it. Liability for tax is also not affected by the fact that no assessment was made (s. 152(3)). A share sale that gives the buyer control also ends the tax year immediately before the change, which can add a short-year T2 (s. 249(4); CRA: T2 guide, chapter 1).

Filing also starts a clock. The normal period in which the CRA can reassess a year runs from the day it sends its first notice of assessment, or a notice that no tax is payable, for that year: three years for a Canadian-controlled private corporation and four years for other corporations (s. 152(3.1)). A year with no return and no CRA assessment has no such notice, so that period has not started, and the Act lets the CRA go beyond the period in some cases (s. 152(4)). See how far back the CRA can reassess.

Restarting also brings new accounts, such as a GST/HST account once the corporation passes the small-supplier limit of $30,000 (see when to register), and the first active year opens on the dormant years' closing balances. A buyer, lender or investor may look at the corporation's filing record: see before a startup raises and selling your business.

Example

These examples are illustrative, in Canadian dollars.

Five years with no activity

A software contractor incorporates with a December 31 year-end, never sells anything and never uses the bank account. Five year-ends pass with no T2.

Each year gets its own return, oldest first. With C$0 of unpaid tax, the percentage penalty has no base. Because the corporation was inactive throughout and has nothing on its financial statements, Schedules 100, 125 and 141 are not required, though year 1, the first return, still asks for Schedules 101 and 24. Whether a flat penalty applies is read from the assessments; if it did apply, the statute caps it at 100 days of C$25, which is C$2,500 for one year and C$12,500 for five.

An account opened with a deposit

The owner deposits C$3,000 to open the account and the bank charges C$500 of fees over the year, with no sales. The year-end balance is C$2,500. The corporation now has balance sheet information: cash of C$2,500 against C$3,000 put in (recorded as share capital or as a loan from the owner, which the books must state) less a C$500 deficit. The financial schedules go with the return, and the balance sheet must balance.

Registered for GST/HST, nothing sold

The corporation has C$0 of income and holds a quarterly GST/HST account. The T2 years are nil, but twelve unfiled quarters, three years of them, are a separate set of nil GST/HST returns, each period needing its own return.

Different for you?

• You received a CRA letter or a demand to file: a demand states the time allowed, and the order of the years matters; get corporate tax help to settle which years are owed and how to answer.
• You plan to restart, sell, borrow against or close a corporation that never filed: get corporate tax help to settle which years are owed, whether to file or dissolve, in what order, and how to clear the CRA before any money moves.
• You cannot say whether income, GST/HST or payroll was ever reported: the file may be larger than T2s alone. See catching up on unfiled corporate returns, and bring the account history to corporate tax help.
• You want to know what the catch-up costs: see corporate return cost and quotes.
• The registry has dissolved the corporation or sent a notice: see reviving a dissolved corporation.
• You want to close it now: follow closing a corporation.
• The books will not balance with shares and a shareholder loan: see the nil corporate return and balance sheet, or rebuilding books from bank statements.
• A penalty was charged: see penalties, interest and relief.
• The owner lives abroad: see non-resident owners of a Canadian corporation.
• The owner is a US citizen: the owner's own US filings may be involved as well. See American owners of Canadian corporations, or get cross-border tax help.