Selling or winding up your company

There are two main ways out of a corporation: sell your shares, which gives you a capital gain that may qualify for the capital gains deduction, or have the corporation sell its business assets and then wind up, paying what’s left to the shareholders, which can be taxed as a dividend. The two routes are taxed very differently, so look at both before you agree to a deal.

Selling your shares

When you sell your shares, the buyer takes over the corporation itself. You have a capital gain if what you receive is more than your adjusted cost base plus the costs of selling, and a capital loss if it’s less. Only the taxable part of a capital gain is reported as income. How dividends and capital gains are taxed covers the basics.

The capital gains deduction

If the shares are qualified small business corporation (QSBC) shares, you may be able to claim the capital gains deduction against the taxable gain. The deduction is half of the lifetime capital gains exemption, a lifetime limit that’s indexed to inflation; the CRA’s capital gains deduction page shows the current amount. You must be resident in Canada throughout the year, and you calculate the claim on Form T657.

In general, shares are QSBC shares only if all of these are true:

• At the time of the sale, the corporation is a small business corporation: a Canadian-controlled private corporation with all or most (90% or more) of the fair market value of its assets used mainly in an active business carried on primarily in Canada, or invested in shares or debts of connected small business corporations, or a mix of the two.
• Throughout the 24 months before the sale, it was a Canadian-controlled private corporation and more than 50% of the fair market value of its assets met that same active-business test.
• Throughout the 24 months before the sale, no one owned the shares other than you, a person related to you, or a partnership you belonged to. Newly issued shares are treated as if an unrelated person owned them just before they were issued, with some exceptions, such as shares issued in exchange for other shares.

Because of the asset tests, a corporation that holds a lot of cash or investments it doesn’t use in the business may not qualify. Holding investments in a corporation explains how those investments are taxed while you own them.

Selling the business assets

The other route is for the corporation to sell its assets, such as equipment, inventory and goodwill, and keep the proceeds. The sale agreement may set a price for each asset, a value for the inventory and an amount for goodwill. Selling depreciable property can lead to a recapture of capital cost allowance or to a terminal loss, which the corporation can deduct.

If the buyer acquires at least 90% of the property needed to carry on the business, you and the buyer may be able to jointly elect, on Form GST44, so that no GST/HST is payable on the sale. The election isn’t available if you’re only selling one or more individual assets rather than the business (or part of it), or if you’re a GST/HST registrant and the buyer isn’t.

Getting the money out

After an asset sale, the money is still inside the corporation. When a corporation distributes its property to shareholders because its business is being wound up, or buys back shares for more than the shareholders originally paid for them, the result can be a deemed dividend to the shareholders. Deemed dividends are reported on a T5 slip like other dividends. The dividend tax credit table shows the dividend tax credit rates for your province.

Closing the corporation

• Dissolution. To dissolve the corporation permanently, you apply to the government body that governs its affairs.
• Final T2 return. The final return covers the tax year ending on the date of dissolution, and you indicate on it that it’s the final return. A corporation that has wound up can use a shortened fiscal period for its final return without asking the CRA to approve the change. See Corporate filing and payment dates for the deadlines.
• Clearance certificate. The corporation’s legal representative needs a clearance certificate from the CRA (Form TX19) to avoid being personally liable for its unpaid taxes, interest and penalties. The CRA asks for the resolution to dissolve, the notice of assessment for the final return, and a statement of how the assets have been and will be distributed. Only once you have the certificate can you begin distributing the corporation’s property.
• CRA accounts. Close the payroll and GST/HST accounts. Once the corporation is dissolved, check Form RC145 to see whether you need to send it and the articles of dissolution to the CRA. Otherwise, the CRA considers the corporation still exists, and it has to keep filing returns even with no tax payable.

In short

• A share sale gives you a capital gain, possibly sheltered by the capital gains deduction if the shares are QSBC shares.
• An asset sale leaves the proceeds in the corporation, and paying them out on a wind-up can be a deemed dividend.
• Check the QSBC tests at least two years ahead: they look back 24 months.
• Get the clearance certificate before you distribute anything, and formally close the CRA accounts after dissolution.