First-Year Corporation Tax Calculator for a Short Period
A corporation’s first fiscal period is almost never a full year, and the small business limit and depreciation are both cut to match. Work out the tax on a stub period, when the first return and payment fall due, and whether instalments start next year.
tax on the first period
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Income for the Stub Period
| Item | Basis | Amount |
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What Proration Costs You
| Item | Full Year | This Period |
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Deadlines and What Comes Next
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Points That Decide This
What to Do Next
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Disclaimer: A corporation’s first taxation year begins on the date of incorporation and ends on the fiscal period end it selects, and a fiscal period generally may not exceed fifty-three weeks. Where a taxation year is shorter than three hundred and sixty-five days, the business limit used in computing the small business deduction is prorated by the number of days in the taxation year over three hundred and sixty-five, and capital cost allowance is similarly prorated. Capital cost allowance is also subject to the half-year rule and to the accelerated investment incentive and immediate expensing measures, none of which are modelled here; the depreciation figure on this page applies a single rate to the full cost of additions and then prorates it, which is a simplification. A T2 return is generally due within six months after the end of the taxation year. The balance of tax is generally due within two months after the end of the taxation year, extended to three months for a Canadian-controlled private corporation that meets the conditions in the Act, including conditions relating to the small business deduction and to taxable income in the year and the preceding year. Instalments are generally not required where tax payable for the current or preceding year does not exceed the threshold in the Act, and a corporation in its first year generally has no instalment base from a preceding year; instalment obligations in later years depend on the amounts for those years. Expenditures incurred before a corporation exists are not expenditures of the corporation, and their treatment depends on the circumstances in which they were incurred and on whether the corporation acquires the related property; the costs of incorporating a corporation are subject to specific rules allowing a limited deduction with the balance added to a capital cost allowance class. Amounts withdrawn by a shareholder that are not salary or dividends are generally indebtedness to the corporation and may be included in the shareholder’s income if not repaid within the period allowed. All rates, limits and thresholds on this page are editable inputs that should be replaced with the figures applicable to your taxation year. This page is general information, not tax advice.
A Short Year Shrinks the Allowances With It
New owners usually assume the small business limit is half a million dollars regardless. It is, for a full year. A first period of seven months gets seven months’ worth of it, and the same applies to depreciation.
That rarely matters for a company earning modest amounts in its first months. It matters a great deal for one that starts strongly, because income above the prorated limit is taxed at roughly double the rate.
A business that bills heavily in a short first period can exceed a prorated limit it would never have reached in a full year. That is the one genuine trap here, and it is decided by a year end chosen months earlier, often without much thought.
Choosing the Year End Is the Decision That Matters
The first period can run up to fifty-three weeks, and within that the choice is yours. A longer first period gets a larger prorated limit and defers the first filing. A shorter one brings the first return forward.
There are reasons to pick either. A seasonal business usually wants a year end after its busy period, so the work and the cash land in the same year. A company expecting strong early revenue usually wants a longer first period so more of it sits under the limit.
It is also effectively a one-time choice. Changing a fiscal year end afterwards requires approval and a reason, so the date picked in the first few months tends to be the date forever. Our fiscal year end calculator works through the trade-offs.
Three Deadlines, Not One
The return and the payment are different dates, and the gap catches people out. The return is generally due six months after the year end. The balance of tax is due earlier than that: two months after, extended to three for a CCPC meeting the conditions.
So a corporation can be perfectly on time with its return and still have been late paying, accruing interest for months on a balance it did not know it owed. Working out the tax before the payment date rather than before the filing date is what avoids that.
| Obligation | Generally Due |
|---|---|
| Balance of tax, CCPC meeting the conditions | Three months after the year end |
| Balance of tax, other corporations | Two months after the year end |
| T2 return | Six months after the year end |
Instalments Start in Year Two, Not Year One
Instalments are based on what the corporation owed previously, and a first-year corporation has no previous year. So the first year is generally paid as a single balance.
Year two is where it changes. A corporation whose first-year tax exceeds the threshold will generally be expected to pay the next year in instalments, and a founder who has budgeted for one annual payment can be surprised by monthly ones starting shortly after the first return is filed.
Money Spent Before the Company Existed
Costs paid personally before incorporation are not automatically the corporation’s expenses, because the corporation did not exist when they were incurred. How they are treated depends on what was bought and the circumstances.
Equipment bought personally and then used in the business can often be transferred in, which is a different exercise from claiming an expense. Incorporation costs themselves have their own rule, with a limited amount deductible and the balance depreciated.
Keep the receipts and raise it before the first return is prepared. Some of this is recoverable if handled properly at the outset and simply lost if the first return is filed without anyone asking. It is one of the few first-year items that genuinely cannot be fixed later.
Draws Are Not Pay
Most founders take money out during the first year without declaring salary or dividends. Those withdrawals are a loan from the corporation, and they sit on the balance sheet until something is done about them.
There is a deadline for repaying, and missing it adds the whole balance to personal income. It is rarely urgent in month three and frequently urgent by month eighteen, which is exactly when nobody is thinking about it.
What This Calculator Does Not Cover
- The half-year rule and the accelerated or immediate expensing measures
- Separate depreciation classes, each with its own rate
- HST registration and filing, which runs on its own timetable
- Payroll if anyone including the owner is on salary
- Associated corporations, which share the limit before proration
- Losses in the first period and how they are carried forward
The first return sets the pattern for every one after it. Our corporate tax return service covers the first T2, the opening balances, the treatment of pre-incorporation costs and the shareholder account, and the first-year deadline calendar sets out every date.
Frequently Asked Questions
Common questions on a corporation’s first return.
Related Calculators and Guides
More for a newly incorporated company.
Get the First Return Right and the Rest Is Maintenance
Send us the incorporation date, the year end you have chosen and the first period’s figures. We will prepare the first T2, deal with the pre-incorporation costs and the shareholder account properly, and tell you what falls due and when, including whether instalments start next year.