Many companies in a loss position are often not concerned about filing their corporate income tax returns on time thinking that there will be no late-filing penalties. Advisors also often tell clients not to worry about filing late when in a loss position. Generally, this advice is correct; however, concern should be raised about this advice for non-resident corporations, large corporations, and other filings due at the same time as the T2 Corporation Income Tax Return.
The normal late filing penalty for income tax returns is contained in subsection 162(1) of the Income Tax Act (the "Act"). This penalty is computed as 5% plus 1% per complete month (maximum 12 months or 17%) that the return is late multiplied by the balance of unpaid tax payable when the return was due. Therefore, if no tax is owing at the filing due date, no penalty will arise under subsection 162(1).
For non-resident corporations, a separate late-filing penalty is contained in subsection 162(2.1) of the Act. In 2009, the Tax Court of Canada ruled that this provision did not apply where there was no penalty under subsection 162(1) – generally, because there was no tax due. The Courts also ruled that the non-resident corporation's return was not an information return and the penalty in paragraph 162(7)(a) of the Act also did not apply. In a Federal Court of Appeal decision last year, the Courts confirmed that non-resident corporations that are not subject to a penalty under subsection 162(1) of the Act are also not subject to a penalty under subsection 162(2.1) of the Act; however the Courts agreed with the CRA that they are subject to a penalty under paragraph 162(7)(b) of the Act, being a failure to comply with a duty or obligation imposed by the Act. The penalty for this failure is $25 per day with a minimum penalty of $100 and maximum penalty of $2,500.
For large corporations (corporations in a group with more than $10 million in capital), in addition to the late-filing penalty under subsection 162(1) of the Act, section 235 of the Act imposes a late filing penalty based on the corporation's capital. The penalty is computed as the total of (a) 0.0005% of the corporation's taxable capital employed in Canada at the end of the year and (b) 0.25% of the tax that would be payable under Part VI of the Act (Tax on Capital of Financial Institutions) multiplied by the number of complete months (maximum 40 months) that the return is late.
For corporations with transactions with non-arm's length non-residents, form T106 is required to be filed at the same time as the taxpayer's income tax return. Form T106 is an information return such that the penalty under paragraph 162(7)(a) of the Act will apply. The penalty is $25 per day with a minimum penalty of $100 and maximum penalty of $2,500 per form.
These penalties can be a big surprise for companies that otherwise thought that they were safe in late-filing their returns.