Late T2 penalties: what CRA charges and how to limit the damage

Filing your T2 late costs 5% of the tax you still owed on the due date, plus 1% for each full month late, for up to 12 months. File late again after a CRA demand and it doubles. If you owed nothing on the due date, the late-filing penalty works out to zero, but interest and other problems can still apply.

The standard late-filing penalty

CRA: "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." (CRA: Avoiding penalties)

The maximum is 17% of the unpaid tax (5% plus 12 × 1%).

The repeat penalty

If CRA sent the corporation a formal demand to file, and it was charged a late-filing penalty in any of the three previous tax years, the penalty is 10% of the unpaid tax plus 2% per full month late, up to 20 months, a maximum of 50%. (same source)

Interest is separate, and starts earlier

Interest isn't tied to the filing deadline. CRA charges it at the prescribed rate, "compounded daily on any unpaid balance from the balance-due day to the date of payment." (CRA: Understanding interest) The balance-due day is two or three months after year-end (see T2 deadline vs. payment deadline), so interest can be running months before the return is even due.

Corporations that should have paid instalments can also face instalment interest and, when that interest is over $1,000, an instalment penalty. (CRA: Avoiding penalties)

Example

Arrears interest is added on top, counted daily from the balance-due day.

Can penalties be cancelled?

Sometimes. CRA "will consider cancelling or waiving penalties and interest if the reason for filing late or not paying an amount when it is due may be beyond the taxpayer's control." (CRA: Avoiding penalties) You ask using Form RC4288, Request for Taxpayer Relief. (CRA: How to apply) Relief can only cover periods that ended within the 10 calendar years before the year you apply. (CRA: Understanding interest)

Forgetting, being busy, or an accountant who didn't file are rarely accepted on their own. The reliable fix is filing on time.

How to stop the clock

1. Pay what you think you owe by the balance-due day, even before the return is done. This stops most interest.
2. File as soon as possible. Each full month adds 1% (or 2%).
3. If you're already late, file now; the penalty stops growing once the return is in.