Closing a Canadian corporation: tax, cash and CRA accounts

My corporation stopped selling. Can I leave it inactive?

Yes, but an inactive corporation remains a corporation. Resident corporations generally file a T2 for every tax year, including years with no activity or tax payable. An active federal corporation also files an annual return and information on individuals with significant control with Corporations Canada. CRA: corporation income tax returns; Corporations Canada: annual return.

The registry that incorporated the company controls its dissolution. The federal steps below are an example; a provincially incorporated company must follow its own registry's rules. If the registry has already dissolved the company, see Reviving a dissolved corporation.

I barely used the corporation. What must I settle first?

Even a corporation with little activity must account for every asset, liability and required filing before a voluntary dissolution. Under the federal process, a corporation can apply directly only if it has no property or liabilities; if it has either, its property must be distributed and liabilities discharged before the certificate of dissolution is issued. Shareholder approval is generally required when shares have been issued. Corporations Canada: dissolution guide.

Check whether the corporation still has cash, a tax refund, equipment, a deposit, unpaid shares, money owed by or to a shareholder, or an unpaid supplier. Confirm that prior T2, GST/HST, payroll and information returns are up to date. If they are not, see Catching up on unfiled corporate returns. If the corporation cannot pay its debts, this sequence does not fit; federal law excludes insolvent and bankrupt corporations from voluntary dissolution.

What should I check before paying myself?

Work out the corporation's net position and the tax character of each proposed payment before moving cash. A bank balance does not show how much is available to shareholders. The federal registry requires liabilities to be discharged, and CRA asks for the asset distribution record and plan when a legal representative requests clearance. Corporations Canada; CRA: clearance certificate.

Money the corporation owes a shareholder is different from money the shareholder owes the corporation. If you borrowed from the corporation, see Shareholder loans. The choice between salary and dividends before closing belongs in Salary or dividends.

How is cash or retained earnings taxed when I wind up?

A wind-up payment to a shareholder can contain a return of paid-up share capital and a deemed dividend. Under Income Tax Act subsection 84(2), a distribution on winding up is deemed to be a dividend to the extent its value exceeds the reduction in paid-up capital for that class of shares. Retained earnings are an accounting balance, not a separate pool of tax-free cash.

If a taxable Canadian parent owns at least 90% of each share class and any other shareholders deal with it at arm's length, subsection 88(1) generally replaces this rule. Property distributed to the parent generally passes at the subsidiary's tax cost. Have that wind-up reviewed before distributing.

If shares are cancelled or disposed of, also compare the shareholder's proceeds with the shares' adjusted cost base; exclude the deemed dividend from those proceeds when calculating a possible gain or loss. Income Tax Act, s. 54; s. 84(9). For a nonresident shareholder, see Non-resident owners of a Canadian corporation for withholding and reporting. Multiple share classes or substantial retained earnings need individual analysis before payment. For a sale to a buyer, see Selling your business.

What if I take equipment or other property instead of cash?

The corporation can have a tax disposition even when no cash comes in. On a wind-up appropriation to a shareholder, Income Tax Act subsection 69(5) generally deems the corporation to dispose of the property at fair market value and the shareholder to acquire it at that value. A gain, income inclusion or capital cost allowance recapture may therefore arise on the final T2. The property's value also enters the shareholder distribution calculation under subsection 84(2).

Get a supportable value and the corporation's tax cost for each asset before deciding who takes it. A transfer of business property to a shareholder while registered can itself attract GST/HST. For a non-arm's-length transfer for no or below-market consideration, section 155 generally uses fair market value, unless the recipient is a registrant acquiring it exclusively for commercial activities. Deregistration can also create tax on property still held.

Do I need CRA clearance before distributing assets?

The corporation's legal representative should plan for a clearance certificate before distributing corporate property. CRA says that a representative who distributes without one can be personally liable for unpaid income tax or GST/HST, limited by the value distributed. A certificate does not turn a distribution into tax-free income or erase the recipient's exposure. CRA: clearance certificate; Income Tax Act, s. 159.

CRA asks for assessed required returns, paid or secured tax, the dissolution resolution, the assessed final T2 filed, and a record of distributions made and proposed. For GST/HST accounts CRA administers, it calls for Form GST352 alongside Form TX19. Do not send the clearance request with the returns; wait for the notices of assessment. CRA: clearance documents.

If the corporation has Quebec tax accounts, the person winding it up must also notify Revenu Québec on Form MR-14.B-V and obtain its certificate before distributing property. An unauthorized distribution makes that person personally liable; directors who assented or participated are also liable, up to the value distributed. If Revenu Québec administers its GST/HST account, enclose Form FP-352-V with MR-14.B-V. Quebec Tax Administration Act, s. 14.

The published federal steps need coordinating. Corporations Canada requires property to be distributed before dissolution. CRA's T2 guide says to obtain clearance before distributing and asks for the assessment of the final T2 filed, with Schedule 100 showing asset distributions. After dissolution, CRA treats the return ending on the certificate date as the final return. The certificate covers tax expected at or before distribution. Have a tax and legal adviser agree on the sequence before the final distribution.

In what order do I settle debts and dissolve?

For a solvent corporation, identify liabilities and the tax on proposed distributions first, then complete the wind-up under its incorporating law. The federal process permits either liquidation before applying for dissolution or a certificate of intent to dissolve followed by liquidation; the latter requires creditor and provincial notices. Corporations Canada: dissolution guide.

Do not assume the corporation has ended because sales stopped or a bank account closed. For a federal corporation, Corporations Canada issues the certificate of dissolution; CRA then needs to be told so it does not keep treating the corporation as active. Corporations Canada; CRA: closing accounts.

If I dissolve just after year-end, is there another T2?

Usually, yes: if the corporation survives past its normal year-end, its final T2 covers the short period from the next day through the legal dissolution date. CRA says to mark line 078 yes when the corporation has already been permanently dissolved and the return ends on the date shown in its articles of dissolution. It permits an abbreviated final fiscal period after wind-up. CRA: T2 guide, tax year and line 078.

Even a short period with no sales is a period to account for. Include the wind-up's asset transfers, tax balances and distribution record. For the filing deadline and how to prepare the return, see Filing your corporate return. Loss carrybacks and other uses of corporate losses belong in Business losses.

How do I close GST/HST and file the last return?

Tell CRA why the corporation no longer needs its GST/HST account, give the cancellation date, and file and pay the final return. You can request closure through the CRA business account or Form RC145. The cancellation date for a closing business is the day it closes. CRA: close your GST/HST account.

CRA treats deregistration as creating a reporting period ending the day before cancellation. A further return for the period from the cancellation date through month-end may be required if tax is remittable. Check property still held: non-capital property can create deemed GST/HST at fair market value, while capital property follows basic tax content and change-in-use rules. Review input tax credits for rent, services and other costs that relate to after cancellation. CRA: final GST/HST returns and property.

Each closing return is due one month after its period ends, even for an annual filer: the short return after the day before cancellation, and any required second return after month-end. Excise Tax Act, ss. 238 and 251; CRA: closing example.

How do I finish payroll, corporate tax and Quebec accounts?

Close each program account after meeting its own filing and payment duties. CRA says payroll closure follows final source deduction remittances, final payroll information returns and slips to employees; corporate income tax closure follows legal dissolution and review of Form RC145, with a copy of the dissolution articles where required. Closing a GST/HST or payroll account alone does not close the corporation's T2 account. CRA: closing program accounts.

If your corporation operated in Quebec, CRA closure does not replace Revenu Québec's steps. Check which authority administers each account and keep both sets of account statements.

Does dissolution erase unpaid tax or protect me?

No. Federal corporate law allows proceedings against a dissolved federal corporation within two years and a claim against a shareholder who received property, up to the amount received. Tax liability can last longer: a shareholder who did not deal at arm's length with the corporation can be assessed at any time for unpaid income tax or GST/HST, capped by the value received less consideration and the applicable tax debt. Income Tax Act, s. 160; Excise Tax Act, s. 325. Check the provincial registry rule where applicable.

Directors can be liable for unremitted source deductions, nonresident withholding or GST/HST. One route to liability after dissolution requires CRA to prove its claim within six months after proceedings start or dissolution, whichever is earlier. After a director leaves office, an income-tax recovery action or GST/HST assessment has a two years limit. A reasonable-care defence applies. Income Tax Act, s. 227.1; Excise Tax Act, s. 323. A representative who distributes without clearance has separate exposure up to the value distributed. If debts may exceed assets, get advice before any shareholder payment.

Example

Illustrative amounts in Canadian dollars; no tax rate is assumed. A corporation has C$40,000 in cash, equipment sold for C$10,000, C$8,000 of bills including all final tax, and a documented C$7,000 loan from its shareholder. After paying the bills and repaying the loan, C$35,000 remains (C$40,000 + C$10,000 − C$8,000 − C$7,000). Assume the shares have C$100 of paid-up capital. If that capital is reduced by C$100, the payment generally includes a C$100 return of capital and a C$34,900 deemed dividend. For any share disposition, C$100 rather than C$35,000 remains as proceeds to compare with share cost. If dissolution follows the normal year-end, file a short final T2 through the certificate date. Plan clearance before releasing the remaining property.

Different for you?

• The registry already dissolved the corporation: see Reviving a dissolved corporation before trying to recover property or a refund.
• Prior returns are missing: see Catching up on unfiled corporate returns.
• You need the final T2 deadline or filing steps: see Filing your corporate return.
• You owe the corporation money: see Shareholder loans.
• You plan a salary or dividend before winding up: see Salary or dividends.
• You are selling the business or its assets to a buyer: see Selling your business.
• You have debt, multiple shareholders, non-cash assets, substantial retained earnings or a clearance timing issue: bring the articles, share and loan ledgers, asset values, tax notices, account statements and proposed distribution to corporate tax before distributing property.
• A Canadian parent corporation owns 90% or more of each share class: the subsection 88(1) wind-up rules may apply; bring the share register and asset tax costs to corporate tax.