Business owners tend to imagine a flat fine for filing late. It is not a flat fine. It is a percentage of what you owe, it escalates monthly, it doubles for repeat offenders, and it sits alongside interest that compounds daily. Here is the actual arithmetic.
The base failure-to-file penalty
Under subsection 162(1) of the Income Tax Act, a corporation that files its T2 after the due date pays 5% of the unpaid tax as at the due date, plus 1% of that balance for each complete month the return is late, to a maximum of twelve months.
A return one year past due therefore carries a penalty of 5% + 12% = 17% of the unpaid tax. That is the ceiling for a first offence. It does not keep climbing after twelve months — but interest does, and the next two sections are where it gets expensive.
The repeat-failure penalty
Subsection 162(2) applies a doubled rate where two things are both true: CRA issued a formal demand to file for the year, and the corporation was already charged a late-filing penalty in any of the three preceding tax years. The rate becomes 10% of the unpaid tax plus 2% per complete month, to a maximum of twenty months — a ceiling of 50%.
The trigger most owners miss is the demand letter. Ignoring one does not merely add penalties: failing to comply with a demand to file is an offence in itself, and can be prosecuted separately from the tax owing.
Interest runs underneath all of it
Arrears interest accrues on unpaid tax from the balance-due date, compounded daily at CRA’s prescribed rate. That rate is reset every quarter, and it is 7% throughout 2026. Interest also accrues on the penalties themselves, from the filing due date. Because it compounds daily, interest is charged on interest, so a six-year-old balance costs considerably more than six times one year’s interest.
Two deadlines people conflate
The T2 return is due six months after the fiscal year-end. The tax itself is due earlier — two months after year-end, or three months for a Canadian-controlled private corporation claiming the small business deduction. The late-filing penalty is a percentage of the tax still unpaid on the filing due date, so a corporation that paid in full on time owes no late-filing penalty, even if the return is late. Filing on time but paying late triggers interest without the failure-to-file penalty.
A year you never filed never closes
This part has nothing to do with money. CRA’s normal reassessment period — three years from the notice of assessment, for most CCPCs — only starts running once a year has been assessed. An unfiled year that CRA hasn’t assessed has no start date, so it stays open indefinitely: a corporation with six unfiled years is exposed on all six until they are filed. If CRA has already issued a notional assessment for a year, the clock started on that notice, and so did the 90 days to object.
What reduces the number
- Filing. The monthly component stops accumulating when the return goes in, and the penalty is calculated on unpaid tax — a year with no balance owing carries no failure-to-file penalty, however late it is.
- The Voluntary Disclosures Program. Since October 1, 2025, an application made before CRA contacts you can relieve 100% of penalties and 75% of interest. One made after CRA has raised the issue can still relieve up to 100% of penalties, but only 25% of interest. It’s not available once an audit or investigation has begun.
- Taxpayer relief under subsection 220(3.1), for circumstances such as serious illness, a natural disaster, or CRA delay. It reaches back ten calendar years.
- Replacing a notional assessment. If CRA estimated your income under s.152(7), the penalty is being calculated on their number rather than yours. Filing the real return usually reduces both.
None of that is a reason to wait for a better moment. Every one of those levers works better the earlier it’s pulled, and the relief from a voluntary disclosure shrinks sharply once CRA makes the first move.
Sources: CRA, Prescribed interest rates; Changes to the Voluntary Disclosures Program. General information, not advice for your specific situation.
