Closing a business: a tax checklist for owners

Start with the order of events

Closing a business is a sequence, and the order matters. Employees are paid out and payroll is wrapped up, sales tax is settled, assets are sold or taken out of the business, the last returns are filed and only then are the CRA accounts closed. The CRA’s guidance is to close the business number and its accounts only after the final returns have been processed and the amounts owing are settled.

Pick a closing date early and write it down. Many steps below are measured from the day the business ends, and the GST/HST account uses that day as its cancellation date. For a corporation, the date of dissolution is separate and comes later, so keep the two dates distinct.

Close payroll first if you have employees

If your business stops operating, the CRA’s employer guide sets out the payroll steps. Remit all CPP contributions, EI premiums and income tax withheld from former employees within seven days of the day the business ends. File all T4 or T4A slips and summaries within 30 days of that day, not at the usual end-of-February date, and give each former employee a copy. More than five slips means filing electronically.

Each former employee also needs a Record of Employment, generally within five calendar days after the end of the pay period in which the interruption of earnings occurs. If you have a registered pension plan or a deferred profit-sharing plan, the pension adjustment for affected employees has to be calculated first.

Then you can ask the CRA to close the payroll account through My Business Account, or have your authorized representative do it. Run final wages, vacation pay and any severance through payroll so they appear on the final slips, and ask your accountant before the last pay run if you are unsure how a particular payment is treated.

Deal with GST/HST before the account is closed

If you are registered for GST/HST, tell the CRA you are closing the account, give a reason and a cancellation date, and file a final return. When you close the business, the cancellation date is the day it closes. Use My Business Account or Form RC145, Request to Close Business Number Program Accounts. Until the account is closed, it stays open and returns remain expected.

Closing creates two reporting periods. The first ends the day before the cancellation date. A second runs from that date to the end of the month, and needs a return only if there is tax to remit. In the CRA’s example, an annual filer closing on October 21 has returns due November 20 and November 30.

The less obvious part is deemed sales. You are treated as having sold the inventory and other non-capital property you hold at fair market value just before closing, and as having collected tax on it. Capital property such as equipment is treated as sold for the tax content it still carries, and some earlier input tax credits may have to be repaid. These amounts go on the final return, so ask your accountant to list what you hold before you set the date. If you sell the whole business, a joint election with the purchaser may avoid GST/HST on the sale, subject to conditions.

Account for assets you sell or keep

Equipment, vehicles and inventory that you sell need to be accounted for on the final return. If you claimed capital cost allowance, selling for more than the remaining undepreciated cost can bring earlier deductions back into income as recapture, while selling for less can produce a terminal loss.

Keep a simple schedule listing each asset, what you paid, the CCA claimed to date and what it sold for. A bill of sale supports the figure. If the price is one amount for the whole business, how it is divided among inventory, equipment and goodwill affects your tax, so agree on that allocation before you sign.

File the final returns

For a sole proprietorship there is no separate business return. Business income to the closing date goes on your personal return, and a balance owing is paid on the personal payment date, so set aside funds for it rather than spending the sale proceeds. Ask your accountant which deadline applies to your year.

A corporation files a T2 return even when winding up. The T2 asks whether this is the final return up to dissolution; if you answer yes, the tax year ends on the date of dissolution shown on the articles of dissolution, and no CRA approval is needed for the shortened fiscal period. Until dissolution, the CRA treats the corporation as still existing, and it has to keep filing even when no tax is payable.

Dissolve the corporation and get clearance

An Ontario corporation can be voluntarily dissolved by filing Articles of Dissolution online through the Ontario Business Registry. You need the corporation’s name, its Ontario Corporation Number and an effective date, and the registry lists a fee of $25.00. A federally incorporated company follows a different process, so confirm with your accountant or lawyer. Where Minister of Finance consent applies, the request is forwarded automatically.

Dissolution does not by itself close the CRA accounts. Afterwards, check Form RC145 to see whether you must complete it and send the articles of dissolution to the CRA. Before anyone distributes the corporation’s property, the CRA says to request a clearance certificate on Form TX19. Without one, the person who distributes it can be personally liable for unpaid taxes, interest and penalties, up to the value distributed. Plan shareholder loans, dividends and the final cash distribution with an accountant before this point.

The CRA asks for the directors’ or shareholders’ resolution to dissolve and the notice of assessment for the final T2, which should include Schedule 100 showing how the assets were distributed.

Keep your records after you close

Closing the business does not end the record-keeping duty. For an unincorporated business, records are generally kept for six years from the end of the tax year in which the business ended. For a corporation, the CRA says to keep records for two years after the date of dissolution. Records about long-term property acquisitions and disposals, the share register and similar historical information that could affect a sale, liquidation or wind-up should be kept indefinitely.

Choose who will hold the records, and where, before you shut the office and cancel the software. Export the accounting file, bank statements, payroll reports, sales tax returns, the asset schedule and the dissolution paperwork. Records must be kept in Canada unless the CRA gives written permission otherwise.