Late filing of your tax returns, personal or corporate can have significant negative consequences. In this write up we are going to focus on late filing of corporate tax returns for Small Businesses.
Corporate tax returns are due six months after the end of the corporation’s taxation year. The CRA imposes a penalty if a return is filed after the due date. The penalty is 5% of the unpaid tax that is due on the filing deadline, plus 1% of this unpaid tax for each complete month that the return is late, up to a maximum of 12 months.

The corporation will be charged an even larger penalty if the CRA issues a demand to file the return in a situation where the corporation had been assessed a failure to file penalty in any of the three previous taxation years. The penalty in this case is 10% of the unpaid tax when the return was due, plus 2% of this unpaid tax for each complete month that the return is late, up to a maximum of 20 months.

Note that the Late Filing Penalty calculation is based on “taxes payable” that would have been reported if the return had been filed on or before deadline. With that in mind, if a Canadian Controlled Private Corporation (CCPC) has no taxable income for the year or has fully paid its taxes by installments or otherwise, then the Late Filing Penalty would be zero. It appears that in such situation, a corporation can postpone filing its return for as long as it desires. However, the CRA may specifically request the filing of the return in which case if a corporation ignores repeated requests to file, then the CRA may issue an arbitrary assessment. Often this arbitrary assessment results in taxes owing that are well in excess of what the actual assessment could have been. If the arbitrary assessment is also ignored, the CRA could then garnishee the corporation’s bank account. If this happens, and the corporation then files an actual tax return for the year in question and is due a refund, the CRA can deny such a refund. In fact, under subsection 164(1) of the Income Tax Act, the refund will be certainly denied if it relates to a taxation year for which the return was filed more than three years late.

The CRA ability to refuse refunding taxpayers, personal and corporate alike, under the above-noted subsection of the Act can result in other tax consequences. For example, the refund due to a dividend paying corporation, out of the Refundable Dividend Tax On Hand “RDTOH” is denied even though such refund may be applied against taxes owing. A shareholder of a corporation may not think that there is any penalty for late filing a return because there is no balance owing. However, where there are taxes payable that are offset by a dividend refund, the taxes payable will be assessed, but the dividend refund will be denied if the return was filed more than three years late.

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