Sole Proprietorship: Closing It When You Leave Canada

What do I file to close my business when I leave Canada?

If the business stops, close it on your departure-year return. Report its income up to the day it stops on Form T2125, treat equipment and stock you keep as sold at fair market value, cancel the GST/HST account, and close payroll if you had employees.

A case is not simple when the business keeps running after you leave, when you keep inventory or goodwill of real value, when you had employees, when you are in Quebec (a separate QST account), or when the property you must list on Form T1161 is worth more than $25,000. Departure tax on everything else you own, and the departure return itself, are covered in leaving Canada. These rules start only on the day you become a non-resident; a spouse, children or home kept in Canada can delay it (see spouses leaving Canada on different dates).

Gather before you go:

• A list of business equipment and vehicles: cost, class, undepreciated capital cost and value on the closing date.
• A stock count with cost and value on the closing date.
• Unpaid customer invoices and unpaid bills on that date.
• The last GST/HST return you filed and its period.
• Payroll records for the year: pay, deductions, remittances.

Do I have to close my sole proprietorship, or can it keep running after I leave?

You do not have to close it, but where the business is carried on decides the tax. Canada's emigration rules split sole proprietors into two groups (s. 128.1(4)):

A permanent establishment is a fixed place of business, such as an office, branch, workshop or warehouse; if you have no fixed place, it is the principal place where the business is run. You are also treated as having one where an employee or agent in Canada can sign contracts for you, or fills orders from your stock (Regulation 8201). Whether a home office or a shared workspace counts is a question of fact. If you move to a country with a tax treaty with Canada, the treaty's own meaning of permanent establishment can apply instead, and many treaties leave out a place used only to store or deliver goods; which meaning applies at departure depends on the treaty and the facts.

After you leave, Canada taxes non-residents only on their Canadian-source income (CRA). Keeping Canadian clients from abroad is covered in Canadian clients after moving abroad. If you run the business through a corporation instead, see close or keep your corporation.

Does departure tax apply to my business equipment, inventory and goodwill?

Yes, unless the business is carried on through a permanent establishment in Canada when you leave. The Act excludes capital property, goodwill (Class 14.1) and inventory of such a business from the deemed sale on departure; once the business stops or moves abroad, that exclusion is gone (s. 128.1(4)(b)(ii); CRA). One more exception: if you lived in Canada 60 months or less in the 10 years before leaving, property you already owned when you arrived, or received by inheritance after that, is also left out (s. 128.1(4)(b)(iv)).

Without the exclusion, each item is treated as sold for its fair market value just before you leave:

• Inventory produces business income: value less cost.
• Equipment and vehicles produce recapture or a terminal loss in their class, and a capital gain on anything worth more than its original cost.
• Goodwill of a business that continues abroad is valued like any other property. Goodwill of a business that stops is valued on the facts at that date, such as whether clients, a name or a list could still be sold; keep the basis for the value you use.

If the business stops before you leave and you keep equipment for personal use, the switch to personal use is itself treated as a sale at fair market value (s. 13(7)(a)). Either way, the business property is valued once, at the point it leaves the business.

Business property kept in a Canadian permanent establishment can still be treated as sold on departure by election, on Form T2061A (CRA). The election cannot create or increase a loss (s. 128.1(4)(d)). Listing property on Form T1161 is covered in list of properties when leaving Canada.

When does the business's fiscal period end if I leave mid-year?

If the business still runs when you leave, but not through a permanent establishment in Canada, its fiscal period ends immediately before you stop being resident, and a new one starts (s. 128.1(4)(a.1)). That makes the departure date the last day on your T2125.

If you stopped the business earlier, the last T2125 covers income up to the day it stopped. If it continues through a Canadian permanent establishment, the fiscal period runs as usual. The day you become a non-resident drives all three cases; see the date you become a non-resident.

What goes on the last T2125?

The last T2125 reports the business's full result to its final day, on the departure-year return. The profit also counts for CPP contributions on the same return; see how self-employed income is taxed. Include:

1. Income earned to the closing date, including invoices not yet paid. Most businesses must report on the accrual basis, so money clients pay after you leave belongs on this return (T4002).
2. Inventory sold, or treated as sold at fair market value, with closing inventory at nil.
3. Recapture or a terminal loss for each class of equipment. Recapture arises when the proceeds you subtract exceed the class balance; a terminal loss arises when a balance is left and you no longer own any property in the class (T4002).
4. Expenses up to the closing date only.

The departure-year return reports world income for the part of the year before you leave (CRA). How CCA classes, recapture and terminal losses are worked out is in capital cost allowance; selling equipment and goodwill, including the capital gain part, is in selling a business asset.

How do I close the GST/HST account, and why do I owe GST/HST on items I keep?

Cancel the account online in your CRA account or on Form RC145; the cancellation date is the day the business closes (CRA). File a return for the period ending the day before, due one month after that period ends, and a second short return to month-end if you owe tax for it. If you never registered (a small supplier under $30,000 who chose not to), there is no account to close and no GST/HST on items you keep (Excise Tax Act s. 171(3)).

When you stop being a registrant, the law treats property you held for the business as sold just before (Excise Tax Act s. 171(3)):

The trap: tax on property you keep is easy to leave off the final return, because no sale takes place. Property sold before the closing date is instead an ordinary taxable sale, reported on that return. The steps, the second short return and passenger vehicles are covered in closing a GST/HST account.

If the business keeps running through a Canadian place, the GST/HST account generally stays open, and you keep filing.

Do I have to close my business number, and the payroll account?

You close the program accounts under your business number, such as GST/HST and payroll, each one you no longer need; Form RC145 closes one or more at once (RC145). Payroll comes first, because it has its own last steps.

Before you close a payroll account, remit all deductions, file the final information returns and give former employees their T4 or T4A slips (CRA). When the business stops, the final remittance is due within 7 calendar days (CRA), and the slips and summary within 30 days (CRA). Do these before you leave: the dates run from the day the business stops, not from when you settle abroad.

What happens to an unused business loss after I leave?

A business loss in the final year, including a terminal loss, first reduces your other income on the departure-year return, such as salary earned before you left and the taxable gains from departure tax (s. 3(d)). What is left over is a non-capital loss you can carry back 3 tax years against earlier returns or forward 20 tax years. After you leave, a carried-forward loss offsets only the Canadian income Canada still taxes, such as income from a business carried on in Canada (s. 111; s. 115(1)).

If a loss is still left and you will have no Canadian-taxed income after you leave, a carried-forward loss has nothing to offset; a carry-back to the earlier years can still use it. Ask for it on Form T1A, Request for Loss Carryback, usually sent with the departure-year return (CRA). How carry-back works is in business losses; which losses and credits survive departure is in unused credits and losses when leaving Canada.

What records do I keep, and who deals with the CRA after I go?

Keep the business's records for six years from the end of the tax year in which it ended. The law says to keep them at your place of business or residence in Canada, unless the CRA designates another place (s. 230(1)).

Records kept abroad and opened online from Canada do not count as kept in Canada; you need the CRA's written permission, asked of your tax services office (CRA). Without that permission, the records stay in Canada.

Before you leave:

• Make sure you can sign in to your CRA account from abroad; see CRA My Account from outside Canada.
• Authorize a representative if someone in Canada will deal with the CRA: through My Account for your personal return and My Business Account for the GST/HST and payroll accounts, the fastest ways; Form AUT-01 gives offline access only (CRA).
• Update your mailing address, so notices about the final returns reach you.

Example

These examples are illustrative; amounts are in Canadian dollars.

A Toronto graphic designer stops work and moves to Lisbon in June

She ends all work the day before she leaves and keeps her laptop and monitor (one CCA class) for personal use. They cost C$8,000 plus C$1,040 HST, all claimed as credits; the class balance is C$6,000, and they are worth C$4,000 on the closing date.

• Income tax: the switch to personal use is a sale for C$4,000. With nothing else in the class, the C$2,000 left is a terminal loss on her last T2125, which runs to the closing date.
• GST/HST: she cancels as of the closing date. Basic tax content is roughly C$1,040 × (C$4,000 ÷ C$8,000) = C$520, reported on the final return.

Had she kept working for foreign clients from Lisbon, the fiscal period would end immediately before departure and the same equipment would be treated as sold on departure.

An online retailer keeps a Toronto warehouse

He moves abroad and leaves C$30,000 of inventory in a rented Toronto warehouse, where an employee fills orders. The warehouse, and the employee filling orders from his stock, can give the business a permanent establishment in Canada under Regulation 8201; his new country's treaty may define it more narrowly. If it is one:

• The inventory is not treated as sold on departure, and the fiscal period continues.
• Each year he files a non-resident return reporting the Canadian business income, and keeps the GST/HST and payroll accounts open.

A contractor sells his tools before leaving

He sells all his tools for C$12,000; the class balance is C$8,000, and no tool sells for more than it cost.

• Income tax: the C$4,000 excess is recapture on the last T2125.
• GST/HST: the sale is a taxable sale, charged to the buyer and reported on his final return. With nothing left, no tax on kept property arises.

Different for you?

• The business keeps running from abroad with Canadian clients. See Canadian clients after moving abroad and remote work for clients abroad; with two countries taxing, book a call.
• You keep a place of business, staff or stock in Canada. A non-resident return applies each year; see a Canadian return as a non-resident.
• Inventory or goodwill of real value, a deemed sale election, or property counted for Form T1161 over $25,000. The departure return needs valuations and forms worked out together; book a call about your departure return.
• You had employees, or a Quebec QST account. Each closing has its own deadline; see closing a GST/HST account, then book a call to plan the order.
• Returns or GST/HST periods are missed. Late periods carry their own interest and penalties; see do you file every year after leaving Canada, then book a call about catching up.
• A family member in Canada takes over the business. Each asset, the GST/HST account and any staff move separately, each with its own tax result; book a call before the handover date.
• You run the business through a corporation. See close or keep your corporation.