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Corporate Dissolution - Income Tax Filing Requirements

 

In a previous article, I showed how to dissolve your corporation. In this article, let's look more closely at the Canadian income tax filing requirements that arise when you kill your corporation.

In order to dissolve your British Columbia company, it is necessary for one of the directors to swear an affidavit saying that all of the net assets of the company have been distributed to the shareholders and that the company either has absolutely no liabilities (that is: zero, nada, zilch) or if there are remaining liabilities that provision has been made to pay those liabilities.

One of the potential liabilities a dissolving corporation faces is Canadian corporate income tax. So the cautious director, asked to swear the affidavit in support of dissolution of the company, will want to be sure that the company's corporate income tax account has been properly closed down.

Closing down this account involves filing three main documents:

  1. the final T2 corporate income return up to the date of dissolution;
  2. a request for a clearance certificate; and
  3. the articles of dissolution or application to dissolve the company that was filed with the relevant corporations office authority (in BC, the Corporate Registry).

The main corporate income tax return is the T2 Corporation Income Tax Return. Companies that have been inactive or have had little activity, that have operations only in one province, and that meet certain other qualifications may be able to get by with filing the T2 Short Form. However, the key point is to know that your company must file one of these returns, even if it has been totally inactive. Unlike individuals, Canadian tax laws require all corporations to file income tax returns, even when there is no revenue or no income.

If you don't let the tax department know that your company was dissolved, they will continue to think that it exists, and the company will still be liable to file all required tax returns. This can expose the company directors to personal liability under the Income Tax Act, since, in general, the Income Tax Act makes company directors personally liable for defaults of the company.

The request for a clearance certificate is important to complete because it will allow the company to distribute its net assets to the shareholders. Failure to obtain a clearance certificate can make the directors personally liable for unpaid taxes, interest and penalties if they distribute assets on dissolution. The reasons why and requirements for applying for a clearance certificate are set out in Information Circular IC82-6R5r. (Don't be afraid of the document; it's only three pages long.)

You apply for a clearance certificate using Form TX19 (Asking for a Clearance Certificate) and supplying the information they ask for; usually the distribution plan for the assets and information proving you're a proper representative of the company. Once issued, the certificate will confirm that the company has paid all its taxes that were due up to the requested date of dissolution or that the government has received adequate security for taxes that are owing at or before that date.

Obtaining a clearance certificate will also provide some comfort to the shareholders of the company. Creditors of BC companies, including the tax department, can chase shareholders who receive assets of a dissolved company for up to two years after dissolution. So every shareholder of a dissolving company should make sure that the directors do their job.

This article has focused on the corporate income tax account. You'll also want to close down any other tax accounts, such as for provincial sales tax or GST.

Doing all this may seem like extra work (and it is), and it takes extra time because of the processing in the tax department. Ultimately, though, the procedure is for your protection, as a director or shareholder of the company, so think twice before skipping this step when you dissolve your corporation.

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Always remember that your corporation is a separate legal entity from anyone else - even yourself.