Introduction

Running an active corporation in Canada comes with more than just managing day-to-day operations. The Canada Revenue Agency (CRA) and corporate registries have specific requirements that every active corporation must meet each year.

Understanding what qualifies as an active corporation in Canada, and the obligations that come with this status, is essential for avoiding penalties, preserving tax benefits like the Small Business Deduction, and keeping your business in good standing. This guide breaks down the key requirements for active corporations and highlights what business owners should keep in mind throughout the year.

TL;DR: Active Corporations in Canada (2025)

  • Definition: An active corporation is one that carries on business and earns income, as opposed to being inactive or dormant.
  • Filing Requirements: Must file a T2 return, include GIFI schedules, and often prepare financial statements.
  • Tax Obligations: Active corporations must pay corporate income tax, remit payroll deductions, and handle GST/HST (or provincial sales tax) where applicable.
  • Annual Returns: In addition to taxes, corporations must file federal or provincial corporate annual returns.
  • Record Keeping: CRA requires businesses to keep records for at least six years after the tax year.
  • Penalties: Non-compliance can lead to late-filing fees, interest, audits, and loss of benefits like the Small Business Deduction.

What Is an Active Corporation in Canada?

Definition under the Income Tax Act

The Income Tax Act defines active business as any business activity carried on by a corporation other than a specified investment business or a personal services business. In practice, this means that active corporations in Canada earn income from core business operations—selling products, delivering services, or carrying out regular commercial activity—rather than from passive sources such as interest, rents, or dividends.

An “active asset” is property used principally for the corporation’s business in Canada. To qualify as active, the corporation must be operating primarily in Canada and participating in regular, ongoing business activities.

How Active Corporations Differ from Inactive or Dormant Corporations

An active corporation regularly engages in business, generates income from its primary operations, and carries on day-to-day commercial activity. By contrast, an inactive corporation remains legally incorporated but does not conduct business, earn revenue, or engage in significant transactions during the fiscal year.

Inactive corporations must still meet annual filing obligations. The distinction between active and inactive corporations matters not only for filing compliance, but also for eligibility to claim the Small Business Deduction (SBD) and other tax treatments available to Canadian-controlled private corporations.

Why the Active Status Matters

Eligibility for the Small Business Deduction (SBD)

To qualify for the Small Business Deduction (SBD), a corporation must be a Canadian-controlled private corporation (CCPC) that earns active business income. The SBD provides a reduced federal tax rate of about 9% on up to $500,000 of active business income—much lower than the general corporate rate.

The deduction is gradually phased out if the corporation (and any associated corporations) has taxable capital employed in Canada over $10 million, and it is eliminated completely at $15 million. In addition, corporations with more than $50,000 in passive investment income see their SBD limit reduced, with complete elimination at $150,000. Importantly, the SBD does not apply to specified investment businesses or personal services businesses, which means it’s reserved for corporations engaged in active business operations in Canada.

Learn more about the Small Business Deduction (SBD) in our dedicated guide.

Impact on Corporate Tax Filing Obligations

For active corporations, timely filing is crucial for maintaining eligibility for the SBD and other benefits. Failure to file can result in serious consequences—penalties of up to $2,500 in daily fines, arbitrary tax assessments by the CRA, or even restrictions on banking activity.

CRA Scrutiny and Compliance Expectations

The CRA pays close attention to how corporations file and report their activities. Inactive corporations that skip filing may trigger audits or enforcement actions, while active corporations that misreport income, overstate deductions.

Maintaining proper active corporation status and meeting all filing requirements is not only about avoiding penalties but also about keeping your corporation in good standing for valuable tax benefits. Inactive corporations, by contrast, must still file nil returns to demonstrate compliance and avoid administrative issues.

Annual Filing Requirements for Active Corporations

All Canadian resident corporations, including active corporations in Canada, must file a T2 corporate tax return every year, regardless of whether they earned income or owe taxes. Even inactive or dormant corporations must file a return to stay compliant.

When the T2 Must Be Filed

The T2 is due six months after a corporation’s fiscal year-end. For example, a December 31 year-end requires filing by June 30 of the following year. Late filing triggers penalties, starting at 5% of unpaid tax plus 1% per month, with harsher penalties for repeated late filings.

Learn more in our T2 Deadlines & Penalties 2025 blog for a full breakdown of timelines and penalty rules.

Mandatory Electronic Filing Rules

For tax years after 2023, most corporations are required to file the T2 electronically. Online filing speeds up processing, reduces errors, and makes compliance tracking easier for the CRA.

General Index of Financial Information (GIFI)

The General Index of Financial Information (GIFI) is a standardized set of codes used to report financial statement items on the T2 return. Instead of submitting detailed ledgers or working papers, corporations must use GIFI codes to summarize their financial information for CRA assessment.

Financial Statements Preparation

Active corporations must prepare annual financial statements, including a balance sheet, income statement, and supporting notes. These records support the figures reported on the T2 and GIFI schedules, ensuring accuracy and transparency in corporate filings.

Corporate Annual Return (Federal vs. Provincial)

Separate from tax filings, corporations must file a corporate annual return with their incorporation jurisdiction, either federally under the Canada Business Corporations Act or at the provincial level.

The corporate annual return discloses details such as directors, officers, corporate address, and share structure. Deadlines and filing fees vary by jurisdiction and are distinct from T2 deadlines.

Tax Obligations for Active Corporations

Active corporations must pay corporate income taxes on taxable income at combined federal and provincial rates. For Canadian-controlled private corporations (CCPCs), the federal Small Business Deduction (SBD) lowers the tax rate to about 9% on the first $500,000 of active business income. Income above this amount is taxed at the general federal rate of 15%.

Provincial tax rates vary but usually add between 2% and 14%, which means the combined federal–provincial rates for active corporations in Canada range from about 9% to 29%, depending on income level and jurisdiction.

Balance-Due Dates

While the T2 corporate tax return is due six months after fiscal year-end, tax payments are due earlier. Most corporations must pay their balance within two months of year-end. Certain CCPCs, if they meet conditions, may have a three-month window.

Corporate Tax Instalments

Corporations often need to make installments throughout the fiscal year, either monthly or quarterly, depending on their tax payable amounts. Instalments are due on the last day of the month or quarter and help avoid a large lump-sum balance due at filing time.

Learn more in our guide on corporate tax installment due dates in Canada.

Payroll Deductions and Remittances

Active corporations with employees must withhold and remit payroll deductions for income tax, the Canada Pension Plan (CPP), and Employment Insurance (EI).

Remittances are due periodically, and the frequency—monthly or quarterly—depends on the employer’s average monthly payroll withholdings. Staying compliant with payroll remittances is essential since late or missed payments trigger significant penalties and interest.

GST/HST and Provincial Sales Tax (if applicable)

Corporations engaged in commercial activities must register for and collect GST/HST. Filing frequency (monthly, quarterly, or annually) depends on revenue levels, and collected taxes must be remitted to the CRA on schedule.

In provinces with standalone PST systems, such as British Columbia, Saskatchewan, and Manitoba, corporations must register separately and follow local collection and remittance rules.

Record-Keeping and Documentation Requirements

Retention Periods under CRA Rules

The Canada Revenue Agency (CRA) requires corporations to keep all tax records and supporting documents for at least six years from the end of the tax year to which they relate. If a return is filed late, the six-year period starts from the date of filing.

Certain records tied to unresolved objections or appeals must be kept until those matters are fully resolved. If a corporation is dissolved, records must be retained for two years after dissolution to confirm all tax obligations were met.

Electronic vs. Paper Records

The CRA accepts both paper and electronic records, provided they are accurate, accessible, and secure. Electronic record-keeping may include digital scans, e-invoices, spreadsheets, and accounting software reports.

Digital records must always remain in a readable and reproducible format so they can be provided during CRA reviews or audits.

What the CRA May Request During a Review or Audit

During a review or audit, the CRA may request financial documents such as invoices, receipts, contracts, and bank statements. Clear, organized documentation helps validate the accuracy of filings and ensures smoother interactions with the CRA during audits.

Other Ongoing Compliance Duties

Active corporations in Canada must also maintain a registered office in their jurisdiction of incorporation. This serves as the official address for government correspondence and legal notices. Corporations are required to keep key corporate records at this location, such as articles of incorporation, by-laws, resolutions, and registers of directors and shareholders.

In addition to tax filings, corporations must file an annual corporate return with their federal or provincial registry to remain in good standing. These returns are separate from the T2 tax return and involve confirming details like directors, officers, and corporate address. Filing deadlines and fees vary by jurisdiction, but compliance is essential to maintain active status.

Consequences of Non-Compliance

Late-Filing Penalties and Interest

The CRA applies penalties for late corporate tax returns, starting at 5% of unpaid tax plus 1% per month, with higher rates for repeat offences. Interest also accrues on unpaid balances from the due date until payment is made, compounding daily. In serious cases, non-filing can trigger administrative actions such as account freezes or enforcement reviews.

Risk of CRA Audit or Reassessment

The CRA generally has up to three years after issuing a Notice of Assessment to audit or reassess a Canadian-controlled private corporation (CCPC), and four years for non-CCPCs. In cases of neglect, carelessness, wilful default, or fraud, there is no time limit. Audits are often triggered by inconsistencies, large deductions, or missed filings, and corporations must be ready to provide full supporting documentation.

Loss of Small Business Deduction or Tax Credits

Non-compliance or inaccurate filings may result in the loss of valuable tax benefits, including the Small Business Deduction (SBD). Errors or delays can also cause corporations to forfeit tax credits, which directly increases the effective tax rate. Staying compliant protects access to preferential rates and reduces the risk of costly reassessments.

Conclusion: Staying Compliant as an Active Corporation in Canada

From filing a T2 return on time to maintaining proper records, paying taxes, and meeting annual compliance obligations, accuracy and timeliness are essential to avoid penalties and preserve valuable benefits like the Small Business Deduction.

By staying organized and proactive, corporations can protect their good standing and focus on growth rather than dealing with costly reassessments or compliance issues.

Need support with filings, payroll, or corporate tax planning? Connect with our team through our Contact page to make sure your corporation stays compliant year after year.