Why do incorporated contractors face higher audit risks in Ontario?

Yes, the CRA mandates that every resident corporation file a T2 return annually, even if the business was completely inactive, had no income, or owes no tax. Failing to file a “nil return” for a dormant corporation can result in penalties and the eventual administrative dissolution of your company by the Ontario Business Registry.

The penalty for late filing is 5% of the unpaid tax owing on the deadline, plus 1% of the unpaid tax for each full month the return is late, up to 12 months. If the corporation was assessed a late-filing penalty in a previous year, these penalties double to 10% plus 2% per month, creating a significant financial burden even for small tax balances.

As of 2024 and 2025, the CRA has strictly mandated that almost all corporations must file their returns electronically. If you attempt to mail a paper T2 return—even for a simple Nil return—the CRA can assess an automatic $1,000 penalty for non-compliance with electronic filing rules. We use CRA-certified software to ensure your return is transmitted safely and according to current digital mandates.

This is the most common trap for new directors. While you have six months after your year-end to file the actual T2 paperwork, any tax you owe is generally due within three months for most small Canadian-controlled corporations. If you wait until the six-month filing deadline to pay, the CRA will charge you three months of compounded daily interest.

You can physically transfer the money, but you must have “retained earnings” (profit after tax) to technically issue a dividend. It is a mistake to treat your business bank account like a personal piggy bank. We help you draft the proper “Directors’ Resolution” and file the T5 slips required to make your owner draws legal, preventing the CRA from re-classifying your income as a taxable shareholder benefit.

If the sales figures on your HST return do not align with the revenue reported on your T2 corporate tax return, the CRA’s automated systems will flag the discrepancy. This mismatch is a leading cause of audit assessments and “Request for Information” letters that require detailed reconciliation of your books.

Absolutely. This is called a “Loss Carry-Back.” If your Ontario corporation had a tough year or high start-up costs, we can apply those losses against the profits you made in the previous three years. This often results in the CRA mailing you a cash refund check for taxes you already paid, providing a critical cash flow boost when you need it most.

If you take money out of the company and don’t call it a salary or a dividend, it is considered a shareholder loan. Under CRA rules, if this isn’t paid back within one year after the end of the corporation’s fiscal year, it is added to your personal income and taxed at your full marginal rate. We track these balances monthly to ensure they are cleared or “bonused out” before the deadline.

No, unlike Alberta or Quebec, Ontario corporations do not file a separate provincial return. You file a single T2 return with the CRA, and the CRA collects both federal and Ontario corporate taxes on behalf of the province, though you must still calculate the specific Ontario tax credits and the Ontario Health Tax liability where applicable.

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Common triggers include discrepancies between revenue reported on the T2 return and sales reported for HST/GST, large or unusual expenses relative to industry standards, and repeated years of reported business losses. The CRA also specifically targets “Personal Services Businesses” to ensure incorporated contractors are not disguised employees.

A PSB is a designation where the CRA views an incorporated contractor as an “incorporated employee” of a client. If designated as a PSB, you lose the Small Business Deduction and cannot deduct standard business expenses, resulting in a significantly higher corporate tax rate of roughly 26% to 33%.

The Small Business Deduction lowers the combined federal and Ontario corporate tax rate to approximately 12.2% (rates vary by year) on the first $500,000 of active business income for Canadian-Controlled Private Corporations (CCPCs). To qualify, the corporation must be resident in Canada and controlled by Canadian residents.

Yes, via a Private Health Services Plan (PHSP) or Health Spending Account. Instead of paying for dental work with your “after-tax” personal money, the corporation pays for it as a 100% deductible business expense. For a high-income Ontario professional, this can be equivalent to a 40-50% discount on all medical costs.

Yes, the CRA requires all corporations to submit financial statements using the General Index of Financial Information (GIFI) system. Even if your business is small, you must report a Balance Sheet and Income Statement encoded with specific GIFI codes that align with your tax schedules.

If you use a corporate vehicle for personal purposes, you must maintain a mileage log to determine the business use percentage. The personal portion creates a “Standby Charge” and operating cost benefit that must be included in your income as a taxable benefit on your T4 slip.

Yes, if you work from home, the corporation can pay you a reasonable rent or reimbursement for the portion of the home used for business. This requires a formal office-use calculation and documentation, allowing the corporation to deduct the expense while you potentially receive it tax-free under specific conditions.