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Owning your own business is an exciting and busy time. Unfortunately, sometimes that business comes to an end. This can be a complex time, but this guide will help you understand:
how to dissolve your company, and
the tax implications of winding up your business.
We usually see corporations close for a couple reasons:
Business closure - the business wasn’t profitable or the owner is just tired!
Mistaken incorporation - the corporation was opened without a full understanding of the implications and now needs to be closed.
Hopefully, this doesn’t spell the end of your entrepreneurial journey and that you learned a lot for your next endeavour!
“Every new beginning comes from some other beginning's end” - Closing Time by Semisonic (I know, we are embarrassed of ourselves.)
Corporate Shut-Down Options
There are two ways you can shut down a corporation:
1. File Articles of Dissolution
This is the formal legal method of winding up a corporation. Usually a lawyer will draft and file these documents on your behalf, so there will be some legal fees associated with this method.
2. Allow the corporation to die
Corporations must file an Annual Report with the province in order to continue their existence. Failure to file this report results in the Corporation being automatically dissolved by the corporate registry. You can choose to not file the Annual Reports and allow the company to be dissolved automatically after a couple of years.
Note that tax returns will still need to be filed for the intervening years until the corporation is dissolved. You can either file these simple nil returns yourself (we can provide a template), or you can engage an accountant to file them for you.
We usually recommend the first option, as it’s the easier method since you don't have to remember to file additional tax returns. The price of both options would be about the same, unless you file the nil returns yourself.
Housekeeping
There are some tasks that must be completed in order to successfully shut down your corporation.
Liquidate any non-cash assets - Sell any capital assets or investments to third parties for cash. You can also just transfer ownership to yourself for proceeds equal to the asset’s tax value - you can check your prior year tax return or ask your accountant for the current tax value (undepreciated capital cost - UCC) of your assets.
Pay off any liabilities - It’s important that all loans, credit cards, bills, taxes, etc. are paid before you shut down the corporation. Once paid off, you can close any credit card accounts.
Ensure that there is no more business activity - Cancel any PAD agreements, recurring credit card transactions, etc, going through any corporate credit cards or bank accounts. Also, ensure any cheques you have written have cleared your account. Finally, ensure that all operations have truly ceased, and that there will be no more activity in the corporation (ie. No more sales or expenses).
Close your corporate bank account - Once you’re sure there are no more business transactions, you may go ahead and close your business bank account, and transfer any remaining cash to your personal account. Note that you’ll have to pay any final corporate expenses (like taxes, fees for your final tax return, and final legal fees) with personal funds.
Complete any final bookkeeping - Ensure all of the above transactions are recorded in your accounting system.
Tax Obligations
In either case, you’ll need to make sure that all final taxes have been filed, paid, and that all your tax accounts are closed. These accounts include:
GST/HST (RT) - You’ll need to make sure that all outstanding GST/HST returns are filed up until the day you stopped operating your business. Once business activities have ceased, you can apply to have your GST account closed by giving the CRA business line a call.
Payroll (RP) - You’ll need to make sure that all final payments have been made to your employees and associated remittances have been paid to CRA. Once you have completed your final pay run, you’ll need to file final T4s for your employees. You can then apply to have your Payroll account closed. Also, don’t forget to file ROEs for your employees with Service Canada.
Corporate Taxes (RC) - A final tax return will need to be filed for your last fiscal year, which will be the tax year ended on the date of dissolution of your corporation.
T5s (RZ) - A T5 Statement of Investment Income will need to be filed for your final year to distribute the retained earnings of the corporation to you as the shareholder. More on this below.
Tax Implications
Closing a corporation will have tax implications for its shareholders. These implications depend on whether the company was profitable or not over its lifetime.
Lifetime Profits - The company was profitable if it had positive Retained Earnings on the balance sheet. If this is the case, the profits are distributed to the shareholders as dividends on closing the corporation.
The exact amount of your dividends will be calculated while preparing the final Corporate Tax Return. The dividends will be reported to CRA on a T5 Statement of Investment Income.
This dividend income will be included on your personal tax return for the year.
Lifetime Losses - The company had lifetime losses if it had negative Retained Earnings (ie. a Deficit) on the Balance Sheet. If this is the case, the losses are transferred to the shareholders as Allowable Business Investment Losses (ABIL).
An ABIL may be deducted from other income on your personal tax return, including employment income. If you don’t have enough income to use this deduction in the current year, it can be carried forward for 10 years, or carried back 3 years. It’s a bit of a consolation prize, but can help reduce your tax liability.
How an accountant can help
An accountant can help you complete the corporate shut down. You can expect an accountant to:
Calculate any final dividends or business investment losses
Liaise with your lawyer to ensure any corporate filings (such as the articles of dissolution) are completed
Prepare any final T4s and T5s
Close your CRA program accounts
File any last Corporate tax returns and GST returns required
Remind you of what you will need to do and when (close bank accounts, etc.)