Principal Issues: a) Whether inactive corporations resident in Canada have an obligation to file an income tax return? b) Whether CRA applies the 162(7) ITA penalty if such a corporation fails to file its income tax return?
Position: a) yes; b) generally no.
Reasons: a) Wording of the Act; b) Administrative policy.
APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017
Question 1
Failure to file and inactive corporation
Last year, at the APFF Conference, the Quebec Revenue Agency ("ARQ") was asked the following question:
It is common for an inactive corporation with no tax liability to fail to file. Should such a corporation simply file and obtain regular treatment, make a voluntary disclosure, or file only when tax is payable? In addition, the ARQ is asked to comment on the application of penalties in this context.
The ARQ responded that an inactive corporation, which had no commercial activity in a taxation year, must file an income tax return, but could file a letter explaining the non-filing. As for the penalty for non-filing, the ARQ specified that this penalty was not automatically imposed.
Questions to the CRA
What is the CRA position as to these two elements:
- the obligation to file a T2 return for each of the years in which there is no business activity and, thus, no tax payable; and
- the application of late-filing penalties?
CRA response to Q.1(a)
By virtue of clause 150(1)(a)(i)(A) of the Income Tax Act, R.S.C. 1985, C. 1 (5th Supp.) (the "ITA") a corporation resident in Canada is required, whether or not it has business activities or tax payable in a taxation year, to file an income tax return (a "T2") for that taxation year, as set out in T4012 T2 Corporation - Income Tax Guide. In addition, the Minister of National Revenue has not exercised the discretion conferred by subsection 220(2.1) to generally waive the filing of a T2 in relation to corporations in this situation. The CRA also has not developed an administrative practice under which such corporations would be exempted from the requirement to file a T2.
It should be noted that a corporation qualifying as a Canadian-controlled private corporation ("CCPC") that has net income for the year for income tax purposes equal to zero or a net loss may file a T2 Short Return (T2SHORT T2 Short Return) if certain other conditions are satisfied (see the instructions for this form and T4012 T2 Corporation - Income Tax Guide).
CRA response to Q.1(b)
The Federal Court of Appeal, in Exida.com Limited Liability Company v. The Queen, 2010 FCA 159, stated that the general penalty in subsection 162(7) was applicable in a situation as described above, which applies in circumstances where a person fails to comply with an obligation imposed on the person by the Income Tax Act or the Income Tax Regulations, CRC, c. 945 ("ITR") unless another provision of the Income Tax Act provides for a penalty for such default. Given that, in the circumstances, no penalty for failure to file an income tax return under subsection 162(1) can be applied, which is calculated on the basis of the tax payable for the year by the taxpayer, the taxpayer is not subject to any other penalty, so that the penalty under subsection 162(7) would apply.
However, and although this case has not been reversed to date, the CRA stated in Question 4 of the 2011 Canadian Taxation Foundation Annual Conference Roundtable that since this decision is based on a rather narrow interpretation of the relevant statutory provisions, the penalty under subsection 162(7) will generally not be imposed on resident corporations that failed to file their tax returns where they either had no taxable income or had incurred a loss for the year. The CRA does not intend to change its position in this regard.
Hugo Gravel
Nicolas Bilodeau
October 2017
2017- 070897
Response prepared in collaboration with :
David O’Horan
Business Returns Branch