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:
- 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 (Wind-up) Options
There are two ways you can shut down a corporation:
1. Dissolving Your Corporation
This is the formal legal method of winding up a corporation. Usually a lawyer or a notary will draft and file the articles of dissolution on your behalf, so there will be some legal fees associated with this method.
In some provinces you can file your own articles of dissolution using an online registry service. For example, in British Columbia, you can use the BC Registry Services to dissolve your corporation immediately or by choosing an effective date in the future.
2. Allow the Corporation to Die Automatically
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.
Closing a Business Checklist Canada
There are a few tasks that must be completed in order to successfully shut down your corporation.
What to Do with Assets When Closing a Business in Canada
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.
What to Do with Liabilities When Closing a Business in Canada
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 Accounts
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.
File Your Final Returns and Close Accounts
You'll need to file your final corporate tax return, plus any sales tax, payroll or information slip returns that are outstanding. This can include things like:
- File your final corporate tax return for the period ended on your dissolution date and then close your RC account with CRA>
- File any final GST/HST or provincial sales tax returns and then close the applicable accounts with CRA or provincial bodies.
- File T4s for your payroll account and then close you RP account with CRA
- File any final T5s for dividends issued upon dissolution of the company and close the RZ account with CRA.
We'll go into some more detail below on how to do these things.
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. You can find out more on how to close your CRA program accounts here.
File Final GST/HST Returns and Close Accounts
You’ll need to make sure that all outstanding GST/HST returns are filed up until the day you stopped operating your business. This is typically noted as your "RT" account with CRA.
Once business activities have ceased, you can apply to have your GST account closed by giving the CRA business line a call.
Ensure Payroll Account is Up to Date then Close it
You’ll need to make sure that all final payments have been made to your employees and associated remittances have been paid to CRA for your Payroll Account (RP Account with 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.
File Final Corporate Tax Return and Close Tax Account
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.
You'll also need to reach out to CRA to close the corporate tax account (noted as RC account with CRA).
File Final T5s for Dividends if Needed
A T5 Statement of Investment Income may 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.
You'll also need to close your RZ account (dividend account) with CRA once all final T5s have been filed.
Closing a corporation will have tax implications for its shareholders. These implications depend on whether the company was profitable or not over its lifetime.
If Company Has 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.
If Company Has 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.)
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 aCorporation
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.