October 24, 2024 · Tax Planning and Preparation

Understanding T2 Form: What Small Business Owners Should Know

An image of a calculator, a pen and a T2 Form

When you incorporate your business, it becomes a separate legal entity. It has a separate bank account, registered address, business number, credit score, and tax returns. You must file financial statements (income statement, balance sheet, and cash flow statement) and submit a T2 Corporate Income Tax Return for your corporation. The business also has to make tax payments in monthly or quarterly installments.

Who Should File T2 Tax Form?

The T2 tax form is mandatory for all incorporated businesses in Canada, even if there is no tax liability, they are exempt from tax, they are a non-profit organization, or they have no operations or income. When you are closing your business, you must give the CRA notice of dissolution along with your final tax return to free yourself from filing T2 tax forms. In certain situations, the CRA may require non-resident corporations to file a T2 in Canada if they earn taxable capital gain or dispose of taxable Canadian property.

The CRA has two types of T2 forms:

  • The 8-page T2 Corporation Income Tax Return with several schedules – Any company can use this form.
  • The 2-page T2 Short Return with three schedules – Only Canadian-controlled private corporations with no net income/loss for income tax purposes or those exempt from tax (non-profit organizations) can use this form. These corporations must be based in a single province and report in Canadian dollars. They should not claim refundable tax credits or pay or receive taxable dividends.

How to File T2 Form 

Unlike your T1 form, a T2 Form is extensive and requires several attachments and schedules. While the entire process is exhaustive, here are the broad steps in filing a T2 Form.

Determine Your Fiscal Year: The first step is determining your fiscal year. Unlike personal income tax, which follows the calendar year, a company can evaluate a 12-month fiscal year and file corporate tax returns within six months of the end of the fiscal year. The fiscal year should remain consistent.

Gather Financial Information: The T2 form requires a lot of information, statements and schedules. You can look at the list and start gathering this information after the end of the fiscal year.

Apart from generic information like the name and address of the company and its shareholders, the company’s business number, sources of income, and main activities, the T2 form will need detailed schedules for financial statements, dividend payments and receipts, activities outside Canadian provinces, the company’s and shareholder’s association with other companies and more.

Fill Out the T2 Form: The form has several sections that require specific financial information:

The income and deductions section includes the corporation’s total revenue and allowable business expense deductions. The objective is to determine the taxable income.

The tax calculation section starts with the taxable income, applicable tax credits or deductions, and the tax rate. The objective is to determine the final tax liability.

The T2 form has several schedules, depending on the corporation’s activities. Mandatory schedules for all businesses:

  • Schedule 100: Balance sheet information
  • Schedule 125: Income statement information
  • Schedule 141: General Index of Financial Information (GIFI) Additional information

Other schedules (mandatory for some businesses):

  • Schedule 50: Shareholder information
  • Schedule 7: Aggregate investment income and active business income. This also includes details about small business deductions.
  • Schedule 8: Capital cost allowance (CCA) – depreciation of business assets
  • Schedule 42: Calculations of unused Part 1 tax credits
  • Schedule 6: Summary of dispositions of capital property if you have any capital gains (or losses)

Schedule 1: Reconciliation of accounting income with taxable income. This schedule is complicated as your accounting profit may not be the same as taxable income, and you may need details on the calculations. This portion is best left to professional accountants.

Filing T2 Tax Form: Once you are confident that you have filed the T2 form entirely and accurately and attached all the forms and schedules, it is time to submit the form to the CRA. Businesses with gross revenues below $1 million can file returns on paper or online, but those exceeding $1 million gross revenue can only file online returns.

You have to file the returns within six months of the end of the fiscal year or face a penalty for late filing. If your fiscal year ends on January 20, you should file the returns by July 20.

Contact Glenn Graydon Wright LLP in Oakville to Help You File Your T2 Tax Form

Talk to a professional accountant to help you prepare financial statements and file corporate tax returns accurately. At Glenn Graydon Wright LLP, our accountants and bookkeepers can provide services such as filing taxes and preparing financial statements. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting expertise, contact us at 905-845-6633.