It takes a lot of work to get a business up and running, and even more work to make it a success. There are also a lot of things that need to be done when closing a business, whether it’s a sole proprietorship, partnership or corporation. Taking care of any tax obligations you have should be a top priority.
Below you’ll find a few tax obligations and tax tips for successfully closing a business.
Dissolving a Corporation
Dissolving a corporation is the legal act of ending your business. A business can dissolve once it has no property or liability. You can also start to dissolve a business before all of the assets have been liquidated.
Every business in Canada needs to file a Notice of Dissolution or Change of Proprietorship (or Partnership). Corporations will file an Application for Voluntary Dissolution. Bankrupt corporations cannot apply to be dissolved.
When you close a business, you need to take care of your business accounts. Everything you opened when you started the business needs to be closed. In addition to dissolving a business, the Canada Revenue Agency (CRA) expects you to file a final tax return, close your GST/HST accounts and PST/RST/QST account(s) if you have them and close your payroll account(s).
Keep in mind, you can only close out these accounts if there is no outstanding balance owing to the CRA or any provincial agency. If there is a balance, returns or outstanding tax filing, the Canadian government can prevent you from closing the business.
And since you have alerted the CRA that you are shutting your business down, it could actually ramp up collection actions.
You need to remit all outstanding payroll deductions from your employees’ wages to the CRA, along with any outstanding pension contributions and employment insurance premiums, within seven days of closing your business.
You also have just 30 days to complete and file any outstanding T4 or T4A slips and summaries of pensions, retirement, annuity or other income that is due to your employees or others affiliated with your business.
Just because you’ve remitted everything to the CRA on time doesn’t mean your tax obligations are closed. Even after a business closes, if a former employee believes their withholding taxes were not remitted, they can report the employer by contacting the CRA.
Close your GST/HST Account
If your business makes more than $30,000 a year, it collects GST/HST taxes and forwards these payments to the CRA. If your business makes less than $1.5 million, the funds are remitted annually. If revenue is between $1.5 million to $6 million, you pay quarterly and anything above $6 million, you pay monthly.
Regardless of how much money your business makes, you need to account for and pay any outstanding GST/HST amount to the CRA immediately after closing the business. Doing so entails making two separate calculations: one is for the amounts owning on non-capital property and the second is for the amounts owning on capital property.
Capital property includes most investments, such as land and buildings. Non-capital property includes every other kind of commercial goods and property such as computers, printers, servers and supplies.
File Your Tax Returns
You will also need to file your final tax return and include a copy of the Articles of Dissolution. If you fail to do so, the CRA will presume that the business still exists and expect you to continue to file an annual tax return, even if there is no income to declare.
If a balance is owing after the business has closed, the CRA will continue to collect on that balance.
You might not even be thinking about selling or closing your business, but having a succession plan in place can help make the transition to new ownership much easier.
Any success plan should include your goals and change in business ownership. It can also include things like training for the new owners, and roles and responsibilities for those affected by the transfer or sale of the business.
And it’s never too early to start thinking about succession planning. That’s because it can take several years to implement a succession plan that helps minimize your tax liability.
For example, if the business is a qualified small business corporation, you can claim a lifetime capital gains exemption, which reduces the capital gains tax. The exemption in 2019 is $866,912, which means every Canadian resident who disposes of qualifying small business corporation shares in 2019 can shelter up to $866,912 in capital gains.
The capital gains exemption is indexed to inflation, which means it increases virtually every year.
There are certain conditions that must be met to qualify for the capital gains exemption. Namely, a business needs to be incorporated. If it isn’t, you are not eligible for the lifetime capital gains exemption. A tax professional can explain all of the conditions and help incorporate your business.
FBC — Helping Canadian Business Owners Minimize Tax Risks
There is a lot to do and consider when it comes time to close or sell a business. And it can get confusing — Canada’s tax code is always changing and there are different rules depending on what kind of business you operate. The tax experts at FBC can make the process of closing a business and understanding your tax obligations easy and efficient.
Why FBC? Since 1952, the tax professionals at FBC have worked exclusively with Canadian small business owners, farm operators and independent contractors to minimize their tax risk and maximize their deductions.
To learn about FBC and how we can put more money in your pocket, call us today at 1-800-265-1002 or submit an online form to request an appointment.