Cessation Of A Business and Tax Consequences

There are corporate tax implications when a business is terminated and a corporation ceases to exist. Generally, a corporation ceases to exist on:

• a winding up of the corporation pursuant to provisions outlined in subsections 88(1) or 88(2) of the Act;
• amalgamation with another corporation under subsection 87(1) of the Act; and
• Dissolution of its charter by filing Articles of Dissolution in the jurisdiction in which the corporation was incorporated.

There are differing tax consequences which will result to the corporation and its shareholders, depending on the manner in which the corporation is terminated.

For instance, there are generally tax deferral provisions available to a wholly owned subsidiary that is wound-up into its parent, pursuant to subsection 88(1) of the Act. Similarly tax deferrals are accorded for a statutory amalgamation under Subsection 87(1).

However, a winding-up under subsection 88(2) and distribution of the corporation's assets to its shareholders will generally result in the realization of the corporation's assets at fair market value (S. 88(2)(a)(iv)) and the taxation of such distribution to its shareholders as a dividend at fair market value.

Filing Implications - Business Cessation

On the Federal T2 return, if any of lines 072 (wind-up of subsidiary), 076 (amalgamation) and 078 (dissolution) apply, it is the corporation's final taxation year.

Example: Tax Planning

Consider and quantify the corporate tax impact of effecting a dissolution or termination of the corporation. Will there be corporate tax payable on resulting capital gains and recaptured capital cost allowance or the realization of reserves and deferred amounts?

Consider the utilization of losses to the successor corporation and the fact that an additional taxation year will occur on an amalgamation with another corporation.

Record Retention- The records of the dissolved corporation must also be kept for two years after the day the corporation is dissolved [Reg. 5800(1)(b)].

Clearance Certificates

The responsible representative of the corporation must obtain a clearance certificate from CRA pursuant to S. 159(2) before distributing any of the corporate property to avoid possible liability for the corporation's tax obligations. See Information Circular 82-6, Clearance Certificate, for more details.

Inactive Corporations

If the articles of the corporation are still legally in force, despite the corporation being inactive, the corporation must file a tax return.

While each province has legislation for its own corporate tax laws, the federal government administers returns and collects taxes for most provinces and territories. However, Quebec, and Alberta administer their own corporate tax returns. To learn how this topic pertains to corporate taxation at the provincial level, refer to the applicable provincial legislation, guides and information circulars.