Some small business owners get busy running their business, and do not get around to filing their company’s corporate income tax returns until long after they are due. Of course, in practice the owner usually hires an accountant for this process; what the owner fails to do is get the business’s records in enough order to provide them to the accountant in time.
There are penalties for filing returns late: usually 17% of the unpaid tax once a return is 12 months late.
Some business owners prepay their companies’ instalments in amounts they think are “about right”, so that they are not in debt to the CRA even though they have not gotten around to filing.
There is a serious danger in doing this.
If a corporate return is filed more than 3 years after the year-end — i.e., more than 2.5 years after its due date — then the CRA will tell you that it cannot refund any overpaid instalments, because subsection 164(1) of the Income Tax Act prohibits it.
It may be possible to get the CRA to transfer the unrefundable balance to a later year for which tax is owing, using Income Tax Act section 221.2. The CRA used to permit this. However, Form RC431 now requires the corporation to show why it was “unable” to file its return within the 3 years. This stringent test will be almost impossible to meet in many cases. (Representations have been made to the CRA to change this administrative requirement, and the CRA has promised for years that changes are coming, but little has happened.)
It is also possible to ask the CRA to extend the deadline for filing the return, based on the 2018 Federal Court of Appeal decision in Bonnybrook Park Industrial Development Co. The Court has told the CRA it has the legal right to do this, but the CRA so far has not developed any policy allowing it.
Even if you do not pay instalments, the same problem arises if the CRA issues an “arbitrary assessment” of the corporation because it has not filed, and then seizes funds from the corporation to pay that assessment. If the corporation then files its return more than 3 years after year-end, showing less tax owing, it likely will not be able to get a refund of the “overpaid” amount. (It might be able to argue in Federal Court that funds seized have not been “paid” by the corporation and so are not subject to the 3-year rule, but this is uncertain.)
So it’s important to get your corporation’s income tax return filed on time, or at least not overly late.