How to Dissolve a Corporation in Canada
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:
- the steps to take to wind up your operations so that you end up with no surprises
- the tax implications of winding up your business, and, finally,
- how to dissolve your company
We usually see corporations close for a couple reasons:
- Business closure - the business wasn’t profitable or the owner is just tired (or retired)!
- 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.)
Ceasing Operations
First, just because you are no longer operating your business, it doesn’t mean that you need to immediately wind up your corporation.
Your corporation can continue to exist, even if there’s no business operations. Dissolving your corporation too soon could lead to paying additional tax or losing out on valuable tax refunds.
So, the first step is just to cease operating.
Complete any outstanding work promised to clients, send out any final invoices, and collect any outstanding accounts receivable that you are owed.
Cancel any real estate or equipment leases, software subscriptions, or any other recurring expenses that you no longer need
If you have staff, ensure that they are let go in a compassionate manner.
Make sure all wages, severance, and CRA remittances are paid, and ensure ROEs are filed so they can claim EI benefits if available
Close up and move out of your work premises, if you have one
Now that you’ve stopped actively operating your business, your corporation is now a holding company with some assets and liabilities.
The next step will be to talk to your accountant, lawyer, and any other business advisors to come up with a comprehensive plan to finalize the shut down of your business.
CRA Obligations
You’ll need to understand your tax obligations in order to wind up your corporation efficiently and effectively.
The following returns and program accounts will need to be filed and closed:
GST/HST (RT)
All outstanding GST/HST returns need to be filed up until the day all operations have ceased, and you are no longer collecting GST from customers.
Once all returns have been filed, ensure that any balances owing are paid to CRA, or any refunds are deposited to your corporate bank account.
Once you are sure that you will have no more GST activity, you can apply to close your GST/HST account.
You can do this online through CRA My Business Account or by calling CRA’s Business Inquiries line.
Note that you can close your GST account BEFORE you dissolve your corporation. Holding companies generally are not required to be registered for GST.
Payroll (RP)
As noted above, ensure that 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.
Ensure that any arrears balances owing have been paid to CRA, or refunds have been received, if any.
Once you’re sure that there will be no more payroll activity for your corporation, you can apply to have your Payroll account closed.
Again, you can do this online in CRA My Business Account, or by calling CRA’s Business Enquiries line.
Finally, don’t forget to file ROEs for your employees with Service Canada!
Corporate Taxes (RC)
Depending on the timing of the shut down of your operations, and when you decide to dissolve your corporation, you will need to file at least one final tax return.
However, best practice is that you will likely need to file at least two final tax returns: one for your last year of operations and one as of the date of dissolution of your corporation.
Ideally, the date of dissolution return should be a nil return since the company should be an empty shell by that point.
The timing of your corporate dissolution and final tax return will depend on your circumstances.
See below for the tax implications of winding up and dissolving your corporation, but it is highly recommended that you obtain guidance from your lawyer, accountant, and any other trusted business advisors.
CRA will automatically close your Corporate Tax account once it has received your notice of dissolution and your final tax return.
T5s (RZ)
T5 Statements of Investment Income will need to be filed to report any distributions from the company to the shareholders on winding up operations and dissolution.
Again, it is highly recommended that you consult with your business advisors to come up with an optimal plan for your situation.
CRA will automatically close your RZ Information Return account once it has received your notice of dissolution and final corporate tax return.
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 simple way to tell if the company has undistributed lifetime profits is if it has positive Retained Earnings on the balance sheet.
If this is the case, the profits will need to be distributed to the shareholders as dividends before the corporation can be dissolved. This is where tax planning comes in!
The calculation for the total dividends you will need to distribute is complex, and outside of the scope of this article, but they will need to be reported to CRA on a T5 Statement of Investment Income for each shareholder, and then reported on the shareholder’s personal tax return as dividend income.
Simply put, the larger the retained earnings balance, the more dividends will need to be declared, and the more personal tax the shareholders will need to pay.
To take advantage of lower personal marginal tax rates, it may be better to take those dividends slowly over time, rather than all at once.
This is why it is so important to talk to an accountant and come up with a plan before dissolving your corporation!
Lifetime Losses
The company has lifetime losses if it has negative Retained Earnings (i.e. a Deficit) on the Balance Sheet.
If this is the case, the losses may be able to be transferred to the shareholders as Allowable Business Investment Losses (ABIL).
The calculation of the allowable amount is also beyond the scope of this article.
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 personal tax liability.
Housekeeping
Now that you have talked to your business advisors and come up with a plan to finalize the wind-up and dissolution of your corporation, you can proceed with all the housekeeping tasks needed in order to clean up your corporation and empty it out.
Liquidate Any Non-cash Assets
If you can, sell any capital assets or investments to third parties for cash at fair market value.
You’ll want to convert as much to cash in the company as you can for the final stages of winding up the corporation.
If there are any assets (computers, cell phone, vehicles) that you want to keep as a shareholder, you can also just transfer ownership to yourself for proceeds equal to the asset’s fair market value as a shareholder withdrawal. (Note, there may be tax implications to doing this.)
Pay Off Any Third Party 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.
Once dissolved, the directors of the former corporation will take on all liability for any unpaid debts, so it’s important to ensure that these are all cleared before dissolution to protect your personal assets.
You may want to consult with your lawyer to determine if there are any liabilities that are not obvious, such as outstanding lawsuits, etc.
Ensure There Is No More Business Activity
Do a final sweep to ensure there is no remaining business activity in the company. Check that all PAD agreements, recurring credit card transactions, etc, going through any corporate credit cards or bank accounts have been cancelled.
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 any payment processing or money transfer accounts, such as Stripe, Wise, etc., and transfer any remaining funds to your corporate checking account.
Close any extra bank accounts, like savings or investment accounts.
Leave One Bank Account Open
Important tip - leave one bank account open as you will need this to pay any taxes or receive any tax refunds in the final stages of your corporation.
Pay off your Shareholder Loan
If you have historically loaned money to your company, and your shareholder loan is in a CREDIT balance, you may now repay yourself from the corporation’s funds.
Complete any Final Bookkeeping
Ensure all of the above transactions are recorded in your accounting system.
Execute your wind-up tax plan
This will be the plan you created above.
Distribute the remaining assets to shareholders as part of your tax plan according to the schedule you determined with your business advisors.
File all final tax returns.
Close Your Corporate Bank Account
The final step before dissolving your corporation will be to close your last bank account.
Once you are sure there are no more business transactions, all taxes and liabilities have been paid, all tax refunds received, and the bank account is empty, you can close the bank account.
NOW you are ready to dissolve your corporation.
Corporate Shut-Down (Wind-up) Options
There are two ways you can shut down a corporation:
Dissolving a corporation means completing the legal steps to end the life of this separate legal entity.
There are two main ways to accomplish this in Canada:
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 returns yourself, 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.
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
- Advise on the best plan to pay out final dividends in a tax efficient manner
- 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.)
Summary
It’s a hassle for sure, but remember that corporations are people under the law and getting rid of people is never easy. You could do it yourself, but getting professional help can make the process a lot smoother. Think of the Wolf in Pulp Fiction… is it me or did this article just get really dark? Anyways, we are here to help and will keep our macabre humour at bay, we promise.
Here are some additional resources to help:
- Law Depot - Dissolving a Corporation
- CRA - Closing CRA program accounts
- CRA - Allowable Business Investment Losses (ABIL)
- TaxPage.com - Dividends on Wind-up (the long version)
Frequently Asked Questions
We've received a number of questions around how to close a corporation across Canada so we'll provide a quick summary of those topics below.
How to Close a Corporation in Ontario
To dissolve a corporation in Ontario, you can either voluntarily or involuntarily dissolve your corporation.
Voluntary dissolution starts by filing articles of dissolution either through a lawyer or by using the Ontario Business Registry online.
Involuntary dissolution means that the company may be dissolved without a director's input due to a number of reasons. A couple of common examples are that the corporation has not kept up with its annual legal filings or it has not maintained the required number of directors or Canadian resident directors. Find out more on involuntary dissolution in Ontario here.
Allowable Business Investment Losses from Closing a Corporation
If your corporation has lifetime losses prior to dissolving it, you may have an allowable business investment loss on your hands.
A business investment loss results from disposition of certain capital properties such as shares in a small business corporation. If you dissolve your company and have a loss, you may be able to claim a business investment loss.
The allowable business investment loss may be deducted on your personal tax return. 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.
How to File a Final Tax Return for a Dissolved Corporation in Canada
The process for filing a final tax return for a dissolved corporation in Canada is similar to filing a normal corporate tax return. However, there are a couple of key differences.
The most important difference is that the financial period for the tax return will be ending on the date of dissolution. This typically does not fall on the usual corporate year-end date unless the dissolution was planned that way.
For example, you may have a December 31st year-end for your corporation. If you dissolve your company on January 9, 2023, you would need to file a December 31, 2022 corporate tax return AND a tax return for the 9 days ended January 9, 2023. This can create additional costs so it helps save accounting fees if it's feasible to plan the dissolution date to fall on your normal year-end date.
The other main differences relate to how your accountant will need to complete your tax return. These include things like noting that it's the final tax return, disposing of all assets that have a tax balance and ensuring that schedule 3 is prepared if dividends are being filed.
It's not overly complicated and your corporate accountant will be able to handle the filing fairly easily.
