Wind Up Your Corporation Before Leaving Canada, or Keep It?

Should you wind up your corporation before leaving Canada, after, or keep it?

There are three choices, and only one has a deadline: a wind-up taxed at resident rates must be paid out while you are still a resident. After your departure date only the other two remain, and for a company holding mostly cash they can mean two Canadian taxes on the same value. Which costs less depends on the company's value, its paid-up capital (usually the small amount paid for the shares at incorporation), the gains inside it and the treaty rate with your new country. No choice is cheaper in every case.

You can also mix them: dividends paid while you are still a resident lower the shares' value, and so the departure tax, whether you then wind up or keep a near-empty corporation.

A case is not simple when the company holds real estate, investments or large retained earnings, when a spouse or child stays in Canada as a shareholder, or when you will run the company from the new country. Each of those changes the tax on the payout, the shares or the corporation itself.

Gather these numbers first:

• Retained earnings and cash on the latest balance sheet
• Paid-up capital and your cost of the shares
• Assets with gains inside the company (real estate, investments, equipment) and their current value
• A defensible value for the shares on your departure date
• The corporation's capital dividend account balance
• The dividend rate in Canada's tax treaty with the new country, if there is one

How is a wind-up taxed if you close before leaving Canada?

When a Canadian corporation distributes its funds or property on a winding-up, everything above the paid-up capital of the shares is deemed a dividend (Income Tax Act, s. 84(2)). If you are still a resident when it is paid, that dividend goes on your Canadian return at ordinary resident dividend rates, with the gross-up and dividend tax credit.

If the corporation has a capital dividend account (for example from the untaxed half of past capital gains), it can elect to pay that part as a capital dividend, which is tax-free to a resident (s. 83(2)). Paid after you leave, the same capital dividend is subject to Part XIII tax (s. 212(2)(b)).

The deemed dividend is not also counted as proceeds for your shares (Income Tax Act, s. 54, proceeds of disposition), so the same money is not taxed twice as a capital gain. Once the company has paid out everything, your shares are worth little on departure day, even if dissolution finishes later, so there is little left for departure tax to measure.

Property handed to you instead of cash is treated as sold by the corporation at fair market value (Income Tax Act, s. 69(5)). Gains and recaptured depreciation on that property are taxed in the corporation's final return before the payout.

How is a wind-up taxed if you close after leaving Canada?

Canada can tax the same value twice. On departure, you are deemed to have sold your shares at fair market value and pay tax on the gain (Income Tax Act, s. 128.1(4)(b)). When the company later winds up, the payout above paid-up capital is a deemed dividend to a non-resident, subject to 25% Part XIII tax unless a treaty lowers it (Income Tax Act, s. 212(2); CRA T4061).

The wind-up also leaves you with a loss on the shares, because their cost was reset to their departure value and the deemed dividend is not proceeds. Canada's relief for that loss (s. 128.1(8)) reaches only shares that are taxable Canadian property, usually shares whose value comes mainly from Canadian real estate. Shares of a typical operating or consulting company holding cash are not, so both taxes can stand on the same value; see departure tax on private company shares.

Whether the new country gives credit for either Canadian tax is a question for that country's law and the treaty.

What does it cost to keep a Canadian corporation after you leave?

A corporation incorporated in Canada stays resident in Canada under the Income Tax Act after its owner leaves, unless a tax treaty makes it a resident of the other country (CRA: Residency of a corporation), so the yearly obligations continue.

For withholding, NR4 and how losing Canadian control works, see non-resident owners of a Canadian corporation. For dual residence and the corporate emigration tax of 25%, see corporation residency after the owner moves abroad. For how each way of paying yourself from a kept company is taxed, see paying yourself from your corporation after moving abroad.

Can you keep an inactive or holding corporation as savings from abroad?

You can, but investment income inside a corporation never gets the small business rate, and the corporation still files a T2 every year. A Canadian-controlled private corporation pays federal tax of 28% plus an additional 10 2/3% on investment income, part of which is refunded when it pays taxable dividends. Once non-residents control it, it is no longer a Canadian-controlled private corporation: the additional tax no longer applies (s. 123.3), and its investment income is taxed at the 15% general rate like its other income, except dividends from Canadian corporations, which are deductible and instead attract refundable Part IV tax of 38 1/3% (s. 186(1)). That holds only if individuals resident in Canada, such as a spouse who stays, do not control it; if they do, it is a substantive CCPC and the additional tax still applies (s. 248(1)).

Every dividend you later take is subject to Part XIII tax. If you keep it, the shares are still deemed sold when you leave, so departure tax applies to their gain, including the investments and cash built up inside. For how a holding company is taxed, see holding and investment corporations.

Does departure tax on your shares apply either way?

Yes, unless the shares are gone or worth little on your departure date. Shares of a private corporation are not on the list of property exempt from the deemed disposition (s. 128.1(4)(b)). One exception: if you were resident in Canada for no more than 60 months in the preceding 120 months before leaving, shares you owned when you last became a resident, or inherited afterward, are excluded. Shares of a company you set up after arriving do not qualify.

If the shares are qualified small business corporation shares on your departure date, the lifetime capital gains exemption can shelter the gain: you count as resident for the whole departure year if you were resident throughout the year before (s. 110.6(5)). A company holding mostly cash or investments usually does not qualify. See using the capital gains exemption before leaving Canada.

You can elect on Form T1244 to defer paying the tax until the shares are actually disposed of. The election is due April 30 of the year after departure, and if the federal tax owing on the deemed disposition is more than $16,500 ($13,777.50 for former Quebec residents), the CRA requires adequate security (CRA: Dispositions of property). Deferral postpones the tax; it does not cancel it. For the share valuation and calculation, see departure tax on private company shares.

In what order do you close a corporation before the move date?

To have the payout taxed as a resident dividend, it must be paid while you are still a resident, so start well before your departure date. Dissolution itself can only follow once the property is distributed and debts are paid (Corporations Canada).

1. Fix your departure date; it sets the deadline for the payout.
2. Stop the business, collect receivables and pay creditors.
3. Sell assets or plan to distribute them; either way the corporation is taxed on any gains.
4. Before the payout, apply for a clearance certificate (Form TX19): whoever distributes the company's property without one is personally liable for its unpaid tax up to the value distributed (s. 159(2), (3)). The CRA wants the final T2 assessed first, so plan the departure deadline and the clearance sequence together. Then pay the final distribution while you are still a resident and report the deemed dividend.
5. File final payroll, GST/HST and T2 returns.
6. Dissolve the corporation under the statute it was incorporated under (federal or provincial), then check Form RC145 for whether to send the CRA a copy of the articles of dissolution to close its accounts (CRA: Closing program accounts).

If anything is paid to you after you leave, Part XIII applies; when the activity ends, the remittance is due within seven days and the NR4 return within 30 days. Until dissolution is complete the CRA treats the corporation as existing and expects returns. For each closing step, see closing a corporation.

What should you gather to compare the choices?

Bring the documents behind the numbers in the first section.

• Latest financial statements and the last T2
• Share register: classes, paid-up capital, your cost, other shareholders
• List of assets, their cost and current value
• A valuation of the shares as of the departure date
• Your expected departure date and income for that year
• Who will run the company and sit as director after you leave, and from where

Example

These examples are illustrative and use Canadian dollars.

A consulting corporation with cash

A consulting corporation holds C$250,000 of cash, has paid-up capital of C$100, which is also what the owner paid for the shares, and no other assets. The owner moves abroad in September.

• Close before leaving: the corporation pays out C$250,000 in August. C$249,900 is a deemed dividend, taxed once on the owner's departure-year return at resident dividend rates. The shares are worth about nil on departure day, so departure tax has almost nothing to measure.
• Close after leaving: the shares are worth about C$250,000 in September, so the owner reports a capital gain of about C$249,900 on the departure-year return, half of it (C$124,950) taxable. The next year the company winds up and pays C$249,900 as a deemed dividend, and the company withholds Part XIII tax, here assumed at a 15% treaty rate: C$37,485 on the same money. The shares are not taxable Canadian property, so the resulting loss on them gives no Canadian relief.

A holding corporation kept after the move

The owner keeps a holding corporation with C$600,000 of exchange-traded funds and moves to Singapore.

• Departure year: the shares are deemed sold at their value, and departure tax is due or deferred with security.
• Each year after: the corporation files a T2, pays tax on its investment income, and withholds Part XIII tax and issues an NR4 on any dividend to the owner.

A dormant corporation

A corporation with no business and C$2,000 in the bank. Closing before the move means a small deemed dividend and the dissolution steps. Keeping it means a T2 every year from abroad, even with no income.

Different for you?

• The company has retained earnings or investments of any size: compare the choices with real numbers before your departure date, with corporate tax help.
• You have already left and the company still holds money or investments: winding up before is no longer possible; compare winding up now against keeping it with corporate tax help.
• The company owns real estate: its shares may be taxable Canadian property, which changes both the wind-up and the departure tax; get corporate tax help.
• A spouse or family member stays in Canada as a shareholder: control, residence and who owns the shares all change the answer; get corporate tax help.
• You will run the company from the new country: see corporation residency after the owner moves abroad.
• You are moving to the United States: see moving across the border with a company.
• You want to sell the company instead: see selling your Canadian company after moving abroad.
• Your business is a sole proprietorship: see closing a sole proprietorship when leaving Canada.
• The corporation has not filed for years: see a non-resident-owned corporation that never filed.
• You are still working out your own departure: start with leaving Canada.