Do Inactive Corporations Still Need to File a T2?

Lots of corporations go quiet. A consultant incorporates for a project that never gets off the ground. A small business winds down and the owner never quite gets around to closing the company. A holding company sits there with a bit of cash in the bank and nothing else going on. And at some point the owner wonders whether a company doing nothing still owes the CRA a T2.

It does. Canadian resident corporations file a T2 for every single tax year they exist: profit, loss, or a year where literally nothing happened. The more interesting part is what that return actually contains, which other obligations tick along in the background, and at what point dissolving the company beats filing for it forever.

Why the Filing Requirement Doesn’t Switch Off

Filing isn’t triggered by activity. It’s triggered by the corporation existing. So while the company is legally alive, a return is due within six months of each fiscal year-end, full stop. A few kinds of entities are exempt, registered charities and certain tax-exempt Crown corporations among them. Your ordinary private company that just stopped trading? Not exempt.

“No income, no return” is what a lot of owners assume. That one assumption accounts for a good chunk of the overdue corporate returns the CRA goes after every year.

See also: Heat Exchanger Cracks: The Furnace Safety Issue That Annual Inspections Can Catch

Inactive Isn’t Always as Inactive as It Looks

Before you call a corporation inactive, check what’s really going on:

• Bank interest. Even a few dollars of interest is income, and it has to be reported.
• Bank fees and annual costs. They count as expenses. Small losses can build up from them, and those are worth tracking.
• Shareholder loan balances. If the owner took money out in an earlier year, that balance doesn’t vanish when the business stops. There may still be tax consequences.
• Assets still on the books. Equipment, vehicles or investments the company owns still go on the balance sheet, and selling them down the road will have tax effects.

And a corporation that holds investments or rents out a property isn’t inactive in the first place. It’s earning passive income, which means a full return with the proper schedules.

What a Nil Return Involves

When a corporation truly had no transactions, it still files the standard T2. Most schedules will just be nil or close to it. Expect the return to include:

• The identification section: business number, fiscal period, type of corporation.
• Financial statement information in the CRA’s GIFI format. That means a balance sheet, even if nothing moved, and a nil income statement.
• Shareholder information on Schedule 50.
• Whatever other schedules apply, for example loss carryforwards from years when the company was active.

With no tax owing, a late nil return usually escapes the standard late-filing penalty, since that penalty is calculated on unpaid tax. Late still isn’t harmless, though. The CRA can send a demand to file. Unfiled years can also stall a refund or some other matter you have with the CRA. Worst of all, the gaps come back to bite when you eventually try to dissolve the company, sell it or bring it back to life.

Other Obligations That Keep Running

The T2 is only one of the things a dormant company has to keep up with.

Ontario Annual Return

Every Ontario corporation has to file an annual return through the Ontario Business Registry, and it’s a separate filing from the T2. Skip those returns long enough and the province can eventually dissolve the corporation administratively. That’s rarely the clean ending owners imagine, particularly when the company still holds assets.

HST Account

A corporation registered for GST/HST keeps filing returns, nil ones included, until the account is formally closed. Close it when activity stops and you save yourself a lot of paperwork.

Payroll Account

If the corporation used to have employees, close the payroll program account once the final T4 slips are out. Otherwise the CRA may keep expecting remittances or nil reports.

Staying on top of T2 corporate income tax filing each year is the main job. But it’s these side accounts where dormant companies tend to fall behind, usually without anyone noticing.

Keep It, Dissolve It or Reactivate It?

If you own an inactive corporation, you’ve basically got three choices.

Keep It Dormant

Why keep it? Maybe you’ll need the corporation again soon. Maybe there’s a business name worth protecting, or losses and other tax attributes that could come in handy down the road. The cost doesn’t stop, though: a T2 to prepare every year, annual provincial returns, bank fees.

Dissolve It

No future for the company? Voluntary dissolution stops the annual filings for good. There’s homework beforehand, though: every tax filing brought current, leftover assets and shareholder loan balances dealt with, the CRA program accounts closed, and a final T2 filed for the dissolution year. Be careful with whatever’s left in the account. Paying out the remaining cash or property to shareholders can trigger deemed dividends or capital gains, which is why the wind-up deserves a plan rather than a quick withdrawal.

Reactivate It

If the business might start up again, catch up the overdue returns first. A corporation with years of missing filings is harder to bank with, harder to borrow through and harder to sell.

Catching Up on Missed Returns

Missed several years? It happens more than you’d think. Dig out each year’s bank statements, file the overdue returns oldest first, and check whether a relief program or a reasonable explanation applies. If the company truly sat idle and owes nothing, catching up costs you time more than money. And it’s generally smoother to sort it out before the CRA sends a demand.

Conclusion

As far as the CRA is concerned, an inactive corporation is still a corporation. It needs a T2 every year, its provincial annual return, and some attention to any HST or payroll accounts left open. If the company has no future, a planned dissolution usually costs less than years of nil filings. If it has one, keeping the returns current means the company is still worth something when you finally need it.

Frequently Asked Questions

Does a corporation with no income have to file a T2?

Yes. Every resident corporation files a T2 for each tax year, even with no income, no expenses and no tax owing.

Is there a penalty for filing a nil T2 late?

The standard late-filing penalty is calculated on unpaid tax, so with nothing owing it’s usually nil. The CRA can still demand the return, though, and missing filings cause trouble later.

Do I still need to file Ontario annual returns for an inactive corporation?

Yes. It’s separate from the T2, and it has to be filed through the Ontario Business Registry for as long as the corporation exists.

Should I close my HST account if the business has stopped?

Usually, yes. Until the account is closed, the corporation has to keep filing HST returns, nil ones too.

What happens to money left in a corporation when it’s dissolved?

Depending on the circumstances, distributions to shareholders on a wind-up can be treated as dividends or as capital gains. Planning the wind-up helps keep the tax under control.