The IT Guy's Untaxed Company Funds: A Near Catastrophic Tax Nightmare! Corporate Investment Income Tax Rate over 50%
- ting wang
- 2 days ago
- 5 min read
This is a real-life account of an IT specialist who may have been too astute about taxes, almost leading to a devastating financial blow from the tax authorities.
Story Background：
The "Perfect" Plan That Almost Exploded
During an economic downturn, contract IT work was booming. Our protagonist, let's call him Jason, landed a lucrative contract with a major bank. His income was excellent.
He heard from friends: "Starting your own company as a contractor saves a ton on taxes! You don't have to take all the income as salary; leaving money in the company means lower tax rates."
Jason thought this was brilliant. He immediately registered his own corporation. Each year, he paid himself a minimal salary, leaving the bulk of his earnings in the company account. On paper, his personal income looked low, and the company's profit seemed modest, benefiting from the lower corporate tax rate compared to personal income tax.
Jason was smug: "I'll just keep this money in the company, let it grow. The company account earns interest, and I can invest it in funds for even more growth. Perfect!"
When the Contract Ended, Things Got Complicated
A few years later, the contract concluded. Jason quickly secured a high-paying, full-time position at a bank—his dream job, offering stability, prestige, and excellent benefits.
Before starting his new role, he tidied up his company's books and casually asked his accountant: "Should I close the company since I won't be using it anymore?"
The accountant reviewed the financial statements and replied: "You can't close it just yet; there's still retained earnings. To close it, you'd need to distribute those earnings, which would incur dividend tax."
Jason found this troublesome. "Then just leave it for now," he decided. "It's fine if it's not closed; the money's still in the company account, earning some interest."
So, he transferred the company's funds into various investment vehicles: ETFs, mutual funds, and fixed deposits. His company effectively went "dormant."
CRA Letters: One After Another
Three or four years flew by. Jason settled into his 9-to-5 banking routine, occasionally remembering his old company but dismissing it with an "it's not operating, so it's fine" mindset.
Until one day, the Canada Revenue Agency (CRA) letters started arriving, one after another:
Notice to File Corporate Return
Final Warning Letter
Even Registered Mail 📮 sent to his home.
He panicked. He quickly gathered all the letters and his company's investment account statements and rushed to his accountant.
The Accountant's Silence When Opening the Account – A Terrifying Moment
Jason's company account held hundreds of thousands of dollars, invested over the years in various ETFs, funds, and term deposits.
The accountant flipped through the records: "You haven't filed corporate taxes for the past few years, have you?"Jason nodded. "No significant income, just investment returns. I didn't touch the money."
The accountant sighed: "Your investment returns from these past few years are all considered company income. A corporation is a legal entity, and its earnings are subject to corporate-level tax."
Jason's face went white. He thought these interests and gains could simply be "left untouched" within the company. He was wrong.
Extremely High Corporate Investment Income Tax Rate (Passive Investment Income Tax Rate): Typically over 50%! This means if his investments earned $100,000, he could owe $50,000 in tax.
Accumulated Retained Earnings: Due to years of continuous profit accumulation, his retained earnings grew substantially. To distribute these earnings as dividends later would incur another round of personal tax.
Even Worse – Non-Compete Agreement: His new employment contract explicitly stated: "Employees shall not hold or control other companies." This meant he couldn't legally keep his company, couldn't easily dissolve it, and couldn't access the money!
Combined, these issues sent Jason into a complete meltdown.
Jason's Famous Quote:
"The small amount of tax I 'saved' back then, I now have to repay to the CRA, multiplied."
The Accountant's Analysis
Many IT contractors follow this path:
To "save tax," they put income into a company.
For "convenience," they neglect filing for years.
For "safety," they don't withdraw the money.
The result is a complex tax trap.
After reviewing Jason's case, we found his problems to be typical:
💥 Problem 1: The company is "active" and must file taxes annually.Regardless of income, as long as the company exists, a T2 corporate tax return must be filed. Investments, interest, and dividends are all considered taxable company income.
💥 Problem 2: Passive Investment Income has an extremely high tax rate.Many believe "investing through a company" is smart, but corporate investment income triggers much higher tax rates, sometimes 50% to 55%, far exceeding personal investment tax rates.
💥 Problem 3: Growing retained earnings mean higher future withdrawal costs.If company profits aren't distributed, future dividends will incur dividend tax. Combined with corporate-level taxes, the total tax burden might be higher than if the money had been taken out directly.
💥 Problem 4: Not filing for years = CRA Blacklist.The CRA automatically calculates "estimated profits," issues assessments, and adds penalties and interest. The longer you delay, the greater the risk.
📘 The Correct Approach:
If you decide not to operate the company after a contract ends:✅ File the final T2 corporate tax return (Final Return).✅ Liquidate company accounts and pay off all taxes.✅ If there are surpluses, plan reasonable dividend or salary distributions.✅ Officially submit Articles of Dissolution to close the company.
The entire process usually takes about a week. The procedures aren't complicated, but it's crucial to legally conclude everything. Otherwise, the CRA will consider the company "Active" and continue pursuing you.
"A company not filing taxes doesn't mean it doesn't exist. As long as it's alive in the CRA system, they will eventually come knocking."
✨ The Outcome
We helped Jason catch up on his overdue T2 filings, calculate passive investment income, pay outstanding corporate taxes, and plan for dividend distribution and dissolution.
Though he lost a significant amount in taxes, he at least avoided further CRA penalties. Finally, the company was successfully dissolved.
Jason said: "That moment truly felt like a huge weight had been lifted."
Key Takeaways from Such Cases:
Closing a company ≠ ceasing operations; you must formally dissolve it with the government.
Regardless of income, if the company exists, you must file taxes!
Passive Investment under a company name has extremely high tax rates.
Retained earnings are not "free savings"; they are a future tax bomb.
Leaving a non-operating company dormant will only get more expensive over time.
📢 If you also have a company registered years ago that you no longer use, has money in its account, or hasn't filed taxes for years, please don't delay!
Find a professional accountant to review, correct, and plan. Many issues can be resolved for a few hundred dollars early on, but waiting a few years can cost tens of thousands.
📬 Want to learn about the Ontario company dissolution process?
We assist clients with the full dissolution process, with transparent fees of $300+HST, completed within a week, ensuring your company is clean and worry-free.
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