Tax Implications of Shutting Down a Business

Geoff Currier

Tax season is “taxing” for all the familiar reasons – the deadlines, the missing information and the shock some taxpayers are facing in light of the tariff fallout and for some the fact they may need to pay CRA instead of receiving the expected refund.  There is a big emotional toll tax specialist can bear as well, for example, when hearing of a new disability, a death in the family, or the demise of a business.  In these volatile times, there may be more of the latter, unfortunately.  Here is what to know as these difficult conversations begin to unfold.

The Backdrop:     An increasing number of clients sitting across your desks may be forced to close down their businesses this year. It’s an all-too-common occurrence in Canada, even before the current tariff war. Over the last five years – 2017 to 2021 - according to the federal government’s Key Small Business Statistics 2024, on average, 103,001 small businesses were created every year and 94,197 disappeared.

With a survival rate of less than 9%, small business clients who can’t make it – the vast majority of them unfortunately - need guidance now on how to deal with CRA when the doors are finally shut. Your client will not want any loose ends or old issues popping up months or even years later, especially if one of their creditors is the CRA.

The Process: Shutting down a business is not an overnight event. It can in fact be a lengthy process and if your client is forced to close because the business has failed it can be as emotionally painful as it is financially.  Where to start? 

Get tax filing up to date.  First up, your client must inform CRA of the decision; do so within 30 days of shutting down operations. Otherwise, it will expect you to continue filing tax returns, submit payroll and GST/HST remittances.  According to CRA all Canada Pension Plan and Quebec Pension Plan contributions, employment insurance premiums and income tax deductions must be remitted to the CRA tax centre within seven days of the day the business ends. 

Also, T4 and T5 slips will need to be filed.  This must be done within 30 days of the business ending.

Tax and accounting specialists can work with clients to ensure these filing are properly done and financial advisors can help identify the right investment accounts to draw money from to pay the CRA to mitigate any tax liabilities.

It’s most important to make sure that CRA is not in a power position to garnishee wages from owner-managers who are employees or hold directors liable for payroll or GST/HST debts. This include “de facto” directors – those who are responsible for the company’s affairs even though they are not legally a director.  Check with a lawyer about these rules.

More Details.  Another reason to check responsibilities on shuttering a business with a lawyer:  if the business is incorporated, does the your client has the legal authority to close it down?  It is possible a board meeting must be convened and a vote taken and documented in the company’s minutes, even if only one or two people are involved.  However, if there are more, they must be informed of the decision to shut down.

Further, there are some forms to file with the to permanently dissolve a corporation. Articles of  Dissolution or Change of Proprietorship form with the province’s corporate registry office must be filed.

Also, review Form RC145, Request to Close Business Number Program Accounts.   It is possible that the form needs to be completed and the articles of dissolution sent to CRA. If this step is missed CRA will assume the corporation still exists.  That means T2 returns will still have to be filed even if there is no tax payable.

Therefore, don’t close all bank accounts right away. The corporate bank account must be reconciled and money may still flow through there.

Employees: Next up is payroll. Final salaries and any severance go to CRA along with a Record of Employment (ROE). This will allow your client’s employees to file for EI benefits if they are eligible. The final T4 slips need to be issued for all employees. As mentioned, your client has 30 days to do this.  However, only seven days are allowed before remittance of Canada Pension Plan and Quebec Pension Plan contributions, income tax deductions and employment insurance premiums. Once that paperwork is complete, it’s time to apply to CRA to close the payroll account.

Cash Left or Debts?  Creditors and suppliers must be paid out. However, it’s possible the business is short on cash. In this event, it may be possible to sell off the assets to pay the outstanding accounts. That can have unfavorable tax consequences – the loss of the Lifetime Capital Gains Exemption for example when there is an asset sale as opposed to a share sale.  A financial advisor can help to determine whether TFSA savings can help bridge urgent payments, like CRA debts for example.

That’s where the company’s individual shareholders figure into the picture.   If there can be a loss on the balance sheet, it is possible they can use that Business Investment Loss to offset their other personal income for the tax year. They should get some advice from you on their options.

Don’t forget, if any cash is distributed to shareholders, the dividends need to be reported on the T1 form, based on the filing of a T5 Statement of Investment Income for each shareholder with CRA.

More Details: Lastly, there is the income tax filing requirements. Money must be set aside for the professional fees required to get this done.  Your client may have pumped a great deal of personal money into the business so it’s critical that the closing of the business be reflected on the personal tax form (T1) and the T2 Corporate Tax Return.  In some cases, T3 Trust returns may need to be filed as well.  There may be shareholder loans or other business losses which create an Allowable Business Loss to help fund some of those professional fees or other debts.  There also may be some loss carry back opportunities.  

The Bottom Line: Naturally all ledgers and accounting must be in order in case of a CRA audit down the line. It’s critical that the final accounting is thorough and documentation is appropriate filed and saved for the required statute of limitation period.

It’s important to be aware that your client may be going through a tumultuous period emotionally and will need all the level-headed guidance you can provide. The amount of paperwork and detail required in closing a business can be overwhelming and you will need to show patience and compassion, all the while your professional standards kick in to do the required job. Don’t hesitate to involve other specialists in the tax accounting, financial and legal fields if your client needs that  help.  A Real Wealth Management approach can make it all work.