First Corporate Tax Return (T2): Short First Year, Due Date

First corporate tax return: when is it due?

A new corporation's first T2 is due six months after its first tax year ends. That first tax year runs from the incorporation date to the year-end the corporation chooses, no more than 53 weeks later. Any tax owing is due before the return: two months after year-end, or three months for a Canadian-controlled private corporation (CCPC) that meets the CRA's conditions. No instalments are due for most corporate taxes in the first tax year (CRA: when to file; CRA: balance-due day; CRA: instalment requirements).

The table shows tax due two months after year-end. Paying three months after year-end as a CCPC depends on a test that looks at a previous tax year, which a first year does not have; see below.

The dates are the easy part. A first return stops being simple when:

• the corporation issued shares, and they were paid for with property, paid later, or not yet paid;
• the founder put money in or lent it, or paid costs personally before or after incorporating;
• a sole proprietor's business moved into the corporation;
• the corporation has an office or other fixed place of business (a permanent establishment) in Alberta or Quebec, a shareholder outside Canada, or a related corporation with the same owners.

The first T2's balance sheet is the starting point for every later return, so an error there carries forward.

Gather before starting:

• the certificate and articles of incorporation;
• the share register and the resolution issuing the shares, with proof of payment;
• corporate bank statements from the day the account opened;
• receipts for every cost the founder paid personally, before and after incorporation.

New corporation first year-end: when does the first tax year start and end?

The first tax year starts on the date of incorporation, not on the date of the first sale. It ends on the year-end the corporation declares on its first T2. The CRA tells a new corporation to use the incorporation date as the start of its first tax year and lets it pick any year-end, as long as that first year is no longer than 53 weeks (371 days) (CRA: determining your tax year). The law sets the same cap: a corporation's fiscal period may not end more than 53 weeks after it began (Income Tax Act, s. 249.1(1)(a)). One exception: a professional corporation that is a member of a partnership and carries on business in Canada must use December 31 (Income Tax Act, s. 249.1(1)(b)(iii)). The first year also ends early, with its own T2 due six months later, if someone acquires control of the corporation or it becomes or stops being a CCPC before the chosen year-end (Income Tax Act, s. 249(3.1) and (4)); see Deemed year-end on acquisition of control.

On the first T2, the corporation answers yes at line 070 (first year of filing after incorporation), files Schedule 24, and gives the address where its books and records are kept at lines 030 to 038 (CRA: T2 guide, chapter 1).

Two traps:

• The month-end after the first anniversary is usually too late. A corporation incorporated on March 20 that picks March 31 of the next year has a first year of at least 377 days, over the cap.
• A first year over 365 days that skips the incorporation year. The law deems a December 31 year-end when a fiscal period over 365 days is the reason no tax year ends in a calendar year (Income Tax Act, s. 249(3)). Whether that reaches a corporation incorporated in early January that picks a year-end a few days into the next January is not settled; a first year of 365 days or less avoids the question.

Which date to choose, and how to change it later, is covered in Choosing or changing a year-end.

Incorporated in December: is a short first fiscal year allowed?

Yes. The CRA caps the first tax year's length but sets no minimum, so a corporation incorporated on December 1 can choose December 31 and have a 31-day first year (CRA: T2 guide, chapter 1).

A short first year is a full tax year. It needs its own complete T2, with financial statement information covering just those weeks, and it starts its own filing and payment deadlines. The next tax year begins the day after it ends. Choosing a short first year means one more return early on; choosing a later year-end puts more activity in the first return.

Does a short first year shrink the small business limit and tax depreciation?

Yes, for a CCPC whose tax year is shorter than 51 weeks. The business limit for that year is the full limit times the days in the year, divided by 365 (Income Tax Act, s. 125(5)(b)). The federal limit is $500,000 for a CCPC not associated with another corporation; associated corporations share one limit (Income Tax Act, s. 125(2) and (3)). A corporation controlled by people or companies outside Canada is not a CCPC, so it gets no small business deduction at all (Income Tax Act, s. 125(7)).

A 31-day first year gets 31/365 of the limit. It matters when the short year's active business income is larger than the prorated limit, because the excess does not get the small business deduction. The second year's test for paying three months after year-end also compares the first year's taxable income with this prorated limit (Income Tax Act, s. 248(1), "balance-due day").

Tax depreciation shrinks the same way. When a tax year is less than 12 months, capital cost allowance on most classes is limited to the share of the full-year maximum that the days in the year are of 365 (Income Tax Regulations, s. 1100(3)).

When to file the first T2: how is the six-month date counted?

When the tax year ends on the last day of a month, the T2 is due on the last day of the sixth month after. When it ends on another day, the T2 is due on the same day of the sixth month. The CRA's examples: a year ending March 31 is due September 30; a year ending September 23 is due March 23 (CRA: when to file).

If the due date falls on a Saturday, Sunday or public holiday the CRA recognizes, the return is on time if the CRA receives it, or it is postmarked, by the next business day. A nil return has the same due date.

The CRA administers provincial corporate tax for every province and territory except Quebec and Alberta (CRA: provincial and territorial corporation tax). A corporation with a permanent establishment in either province may have a separate provincial return too; see Filing your corporate return.

When is the tax paid, and are instalments due in the first year?

Tax is paid before the return is due. The balance is due two months after year-end. A corporation gets three months for most of its taxes when all of these hold (CRA: balance-due day; Income Tax Act, s. 248(1), "balance-due day"):

• it is a CCPC throughout the tax year;
• it claimed the small business deduction for the year or the previous year;
• its taxable income for the previous tax year did not exceed its business limit for that year (associated corporations use a combined test).

The last test looks at a previous tax year, which a new corporation does not have, and the CRA's page does not say how the test applies to a first year. Paying within two months of year-end avoids the question. The CRA expects payments to arrive by the due date to avoid penalties and interest (CRA: paying your balance).

The CRA says a corporation does not have to pay instalments for most corporate taxes for its first tax year after incorporation (CRA: instalment requirements). From the second year, no instalments are needed when tax payable is $3,000 or less for either the current or the previous tax year (Income Tax Act, s. 157(2.1)). For the previous-year test, a short first year's tax is scaled up to a full year, times 365 and divided by the days in that year, so a small amount of tax in a few weeks can still pass the threshold (Income Tax Regulations, s. 5301(1)). Second-year instalments can start before the first year's balance is paid or the first T2 is filed (CRA: instalment requirements). Instalment schedules are covered in Filing your corporate return.

Does a corporation with no sales or no activity still file a T2?

Yes. The CRA says all corporations, including inactive ones, must file a T2 for every tax year, even if no tax is payable. The only exceptions it lists are tax-exempt Crown corporations, Hutterite colonies and corporations that were registered charities throughout the year (CRA: who has to file).

A corporation that has not been formally dissolved still exists for the CRA, and it keeps filing even with no tax payable (CRA: T2 guide, chapter 1). A first year of a few weeks in which nothing happened still needs its T2.

Can I file a nil T2 myself?

Yes. An owner can prepare and file the corporation's T2, but only electronically. For tax years starting after 2023, all corporations must file electronically, except insurance corporations, non-resident corporations, corporations reporting in a functional currency and corporations exempt from tax under section 149 (CRA: corporation income tax return). The return must be prepared with CRA-certified software and can be sent through the CRA's Corporation Internet Filing service (CRA: using tax preparation software). A paper return, including a printed bar code return, draws a $1,000 penalty (CRA: T2 guide, before you start).

A nil return means no income and no tax, not an empty return. A new corporation's first T2 also carries:

The CRA excuses Schedules 100, 125 and 141 only for a corporation inactive all year with no balance sheet or income statement information to report, and accepts them if filed anyway (CRA: GIFI). A corporation that issued shares or holds a bank balance has balance sheet figures to report.

The fewer events, the fewer entries: shares issued for a small cash amount and a few fees make a short return. Founder loans, costs paid personally, property exchanged for shares, or any sales each add entries that set the opening balances of later years. How to build the balance sheet is in Nil corporate return balance sheet.

What usually goes on the first T2?

A first T2 usually records the shares issued and what was paid for them; money the founder put in, as either payment for shares or a loan the corporation owes back; the incorporation invoice and registry fees; costs the founder paid before the corporation existed; and any bank fees, sales or expenses in the first year. The closing balance sheet of that return becomes the opening balance of the next one. How the corporation deducts the incorporation invoice and pre-incorporation costs is in Incorporation costs.

What if the first T2 is late?

The late-filing penalty is 5% of the tax unpaid on the filing deadline, plus 1% of that unpaid tax for each complete month late, up to 12 months (CRA: avoiding penalties). Because this penalty is a share of unpaid tax, it has nothing to apply to when no tax was owing. Whether another, flat penalty applies to a late nil return is not settled; see A dormant corporation that never filed.

A late return still has costs:

• Repeat penalty later. A failure-to-file penalty assessed on the first return can raise the penalty on a later late return the CRA has demanded; see Penalties, interest and relief.
• Refunds. A corporation must file within three years after the end of a tax year to receive a refund for it (CRA: when to file).
• Paper. Filing on paper, late or not, adds the $1,000 electronic-filing penalty.

Example

These examples are illustrative and in Canadian dollars.

Incorporated December 1, year-end December 31

The founder pays C$100 for 100 common shares into the new corporate bank account, and nothing else happens. The first tax year is December 1 to December 31: 31 days. The first T2 is due June 30. No tax is owing; had there been any, paying by the end of February is on time, while March 31 depends on the CCPC test that is unclear for a first year. The nil T2 still shows cash of C$100 and share capital of C$100 on its balance sheet, with Schedules 24, 50, 100, 101, 125 and 141. Had the corporation, a CCPC not associated with another corporation, earned business income in December, its federal business limit for that year would be 31/365 of the full limit, about C$42,466.

Incorporated September 15, year-end August 31 the next year

The first tax year is 351 days (352 if that February has 29 days). It is under 53 weeks, so it is allowed, but under 51 weeks, so an unassociated CCPC's business limit is prorated to 351/365, about C$480,822. The first T2 is due on the last day of February. Tax is due October 31 (November 30 only if the CCPC test is met, which is unclear for a first year), with no instalments in the first year. If first-year tax is C$4,000 (about C$4,160 scaled to a full year) and the second year is expected to be C$5,000, instalments apply in the second year.

Incorporated March 1, wants June 30 the next year

March 1 to June 30 of the next year is 16 months, over 53 weeks, so that year-end is not allowed. The first year-end has to come sooner. With June 30 of the same year:

• Year 1: March 1 to June 30, a 122-day first year. T2 due December 31.
• Year 2: July 1 to June 30. T2 due December 31.

February 28 of the next year would also work (365 days); March 31 of the next year would not, because it is over 53 weeks.

Different for you?

• Shares issued, money the founder put in or lent, or costs paid before incorporating: the first T2 sets the balance sheet every later return builds on. Gather the certificate, share register, bank statements from day one and receipts, then get corporate tax help.
• A shareholder or parent company outside Canada: control from outside Canada stops the corporation being a CCPC, which changes its tax rate and payment date. See CCPC status for a new corporation and Non-resident owners of a Canadian corporation, and get corporate tax help.
• Not sure which year-end to pick: see Choosing or changing a year-end.
• Building the nil balance sheet: see Nil corporate return balance sheet.
• Deducting the incorporation invoice or costs paid before incorporating: see Incorporation costs.
• The business ran as a sole proprietorship first: the election to move it in without immediate tax is due by the owner's or the corporation's filing due date for the year of the transfer, whichever comes first (Income Tax Act, s. 85(6)). See Moving a business into a corporation and Books after incorporating a sole proprietorship, and get corporate tax help.
• The corporation never filed for several years: see A dormant corporation that never filed and get corporate tax help.
• Filing route, Alberta or Quebec returns, or later instalments: see Filing your corporate return.
• CRA accounts to open after incorporating: see After you incorporate.
• The registry's annual return, which is not a tax return: see Corporate annual return.
• Paying yourself in the first year: see Paying yourself from your corporation in the first year.
• The company is a US LLC or corporation: see First tax year of a new US company.