How does the CRA calculate the late filing penalty on a T2 return?
In 2026, a late T2 costs 5% of the tax unpaid at the filing deadline plus 1% per complete month, capped at 12 months (17%). A repeat failure after a CRA demand doubles it: 10% plus 2% a month for up to 20 months. With no tax owing, there's no 162(1) penalty, but large and nonresident corporations still owe one.
Every T2 filing penalty in one table
A corporation files its T2 within six months after the end of its tax year laws-lois.justice.gc.ca. Miss that date with a balance owing and subsection 162(1) applies: 5% of the tax unpaid on the filing deadline, plus 1% of that unpaid tax for each complete month the return is late, for up to 12 months
laws-lois.justice.gc.ca. Those are the rates in force as of October 2026.
| Penalty | ITA section | Rate | Cap |
|---|---|---|---|
| First late filing | 162(1) | 5% of unpaid tax plus 1% per complete month | 12 months, so 17% |
| Repeated failure | 162(2) | 10% of unpaid tax plus 2% per complete month | 20 months, so 50% |
| Corporation not resident in Canada | 162(2.1) | Greater of the above and the greater of $100 or $25 per day | 100 days, so $2,500 on the daily part |
| Required to file electronically but filed on paper | 162(7.2) | $1,000 flat | One penalty per return |
| Large corporation (taxable capital employed in Canada over $10 million) | 235 | 0.0005% of taxable capital employed in Canada plus 0.25% of Part VI tax, per complete month | 40 months, owed even with no tax unpaid |
| Late T2 with no balance owing | 162(1) | Nil | Not applicable |
The CRA's T2 guide states the same rates and adds that a return due on a weekend or holiday is on time if the CRA receives it, or it's postmarked, on or before the next business day canada.ca.
The penalty month by month on $10,000 unpaid
The monthly part only counts complete months. A return filed three weeks late still owes the base percentage, but nothing for the partial month.
| Complete months late | First failure rate | First failure on $10,000 | Repeat rate | Repeat on $10,000 |
|---|---|---|---|---|
| Under 1 | 5% | $500 | 10% | $1,000 |
| 1 | 6% | $600 | 12% | $1,200 |
| 3 | 8% | $800 | 16% | $1,600 |
| 6 | 11% | $1,100 | 22% | $2,200 |
| 12 | 17% | $1,700 | 34% | $3,400 |
| 20 or more | 17% | $1,700 | 50% | $5,000 |
Interest runs on the penalty itself from the day the return was due until the penalty is paid, under paragraph 161(11)(a) laws-lois.justice.gc.ca. That's separate from the interest on the unpaid tax, which starts at the balance due day under subsection 161(1). The current rate is on the CRA interest rate on overdue taxes.
Worked example: $40,000 unpaid, seven months late
Your client is a CCPC with a December 31, 2024 year end. Its 2024 tax was $55,000. It paid $15,000 on June 20, 2025, and its T2 was due June 30, 2025. It files on February 15, 2026. From June 30, 2025 to February 15, 2026 is seven complete months.
| Line | First failure, s.162(1) | Repeat failure, s.162(2) |
|---|---|---|
| Tax unpaid on June 30, 2025 | $40,000 | $40,000 |
| Base part | 5% = $2,000 | 10% = $4,000 |
| Monthly part, 7 complete months | 7% = $2,800 | 14% = $5,600 |
| Penalty | $4,800 | $9,600 |
The $15,000 payment made after the balance due day but before the filing deadline still cut the penalty by $1,800 at the first failure rate (12% of $15,000), because the penalty is measured on tax unpaid on the filing date, not the balance due day. It didn't stop interest on that $15,000 for the months it was late. If your client can't file on time, have it pay the estimated balance before the deadline anyway.
When the repeat penalty applies
Subsection 162(2) needs two things at once. The CRA must have sent a demand to file under subsection 150(2), and a penalty under 162(1) or 162(2) must have been payable for any of the three preceding tax years laws-lois.justice.gc.ca. A corporation that files late three years running, but never gets a demand, stays at 5% plus 1%.
Once both conditions are met, the base doubles to 10%, the monthly part doubles to 2%, and the cap stretches from 12 months to 20. A return 20 or more complete months late costs 50% of the unpaid tax.
If your client hasn't been contacted by the CRA yet, look at the Voluntary Disclosures Program before you file a stack of late returns.
No balance owing: no 162(1) penalty, but real costs
Every corporation must file a T2 for every tax year, even with no tax payable. That includes inactive corporations and nonprofits; the guide names only a few exceptions, like corporations that were registered charities throughout the year canada.ca. A nil balance makes the 162(1) penalty nil, because 5% of zero is zero. Other consequences still apply.
The CRA can demand the return whether or not tax is payable, under subsection 150(2) laws-lois.justice.gc.ca. A demand is also the first condition for the repeat penalty on a later year that does owe tax.
Refunds have a clock. The CRA can only refund an overpayment if the return is filed within three years from the end of the year, under subsection 164(1) laws-lois.justice.gc.ca. The dividend refund has the same three year limit in subsection 129(1)
laws-lois.justice.gc.ca. A corporation that paid instalments or Part IV tax and sits on its T2 for more than three years can lose that money for good.
Two kinds of corporation are exceptions to "nil means nil". A large corporation, one whose taxable capital employed in Canada (with related corporations) is over $10 million at year end, owes the section 235 penalty on top of any other: 0.0005% of its taxable capital employed in Canada plus 0.25% of its Part VI tax, for each complete month late, up to 40 months laws-lois.justice.gc.ca. The formula doesn't use unpaid tax, so it applies with nothing owing
canada.ca. A corporation that isn't resident in Canada owes at least the greater of $100 and $25 per day under subsection 162(2.1), for up to 100 days, even with no tax owing
laws-lois.justice.gc.ca.
The $1,000 penalty for filing on paper
Subsection 150.1(2.1) requires prescribed corporations to file electronically laws-lois.justice.gc.ca. The T2 guide says that means every corporation except insurance corporations, corporations not resident in Canada, corporations reporting in a functional currency and corporations exempt under section 149, and that a CCPC must file electronically
canada.ca.
A corporation that files a required electronic return on paper owes $1,000 under subsection 162(7.2), on top of any late filing penalty laws-lois.justice.gc.ca. Your firm has its own exposure: subsection 162(7.3) charges a tax preparer $100 for each corporate return it fails to file electronically when it has to.
Sources
Can the CRA cancel a T2 late filing penalty?
Yes, through taxpayer relief, when events beyond the corporation's control caused the late filing, such as a natural disaster, a postal strike, serious illness or a death in the immediate family, or when CRA errors or delays caused it canada.ca. Ask with Form RC4288, online through My Business Account or Represent a Client, or by mail
canada.ca. As of October 2026, the CRA quotes an average processing time of about 16 months
canada.ca.
How far back can taxpayer relief reach?
Ten calendar years. A penalty qualifies only if it relates to a tax year ending in the 10 calendar years before the year you make the request, so a request made in 2026 covers tax years ending in 2016 or later canada.ca. Financial hardship can get interest waived, but not penalties.
Is the penalty based on the tax owing on the balance due day?
No. It's based on the tax still unpaid on the filing deadline, six months after year end laws-lois.justice.gc.ca. Anything paid before that date reduces the penalty, even though interest has already run on it from the balance due day.
Do instalment payments reduce the penalty?
Yes. Instalments are payments on account of the year's tax, so they reduce the tax unpaid on the filing deadline, which is the amount the penalty is measured on. A corporation that paid its full year by instalments has nothing unpaid and owes no 162(1) penalty, even if it files late.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.