Shutting down a business you started with passion is a difficult decision. There could be countless reasons to do so. Maybe you want to retire or start a new business, but losses or debt are difficult to manage. Whatever the reason, there is a legal procedure to close your business. Remember all the bank and CRA accounts you opened and contracts entered into with vendors, employees, and all third parties you engaged with when you opened the business—all that has to be reversed, leaving nothing for later.

Why Do You Have to Follow a Legal Way to Close a Business?

You have to tell the Canada Revenue Agency (CRA) that you are shutting down the business, or else it will think that the company is active and expect you to file tax returns. Failure to file returns will lead to penalties. Closing the business without informing will expose you to any legal action by third parties if they decide to file a lawsuit.

Hence, you must inform the CRA, organizations, and individuals about the business closure and settle all accounts so they can close your account from their books. In this article, we will focus on how you can proceed with the business closure process with the CRA.

Cease Business Operations

Once you have decided to close your business, do not rush to shut down all your bank accounts. First, cease all your operating activities. Complete pending orders with the clients, send out any final invoices and collect all pending payments and credits offered to clients.

Note that your corporate bank account should be running. It is the last thing you will close.

‍GST/HST

Once you have ceased all your business operations and are no longer charging Goods and Service Tax/Harmonized Sales Tax (GST/HST) from customers, you can move to settle the GST/HST returns. File all the GTS/HST returns until you cease business operations, pay any dues, and claim refunds. After completing all transactions, you can close your GST account.

Note: As the operations have ceased, your business is a holding company (holding assets and liabilities) that does not have to pay GST.

Close Payroll

Once the client side is settled, it is time to close the payroll, including your family members’ salary. Pay your employees their final salary and severance and remit to the CRA payroll withholding tax within seven days of shutting your business. Ensure you have filed a Record of Employment (ROE) so they can claim Employee Insurance (EI) benefits if available.

Once you have made the payments, file the final T4 slips for employees. Clear all the dues, collect all refunds, and then apply to the CRA to close the payroll account.

Manage Business Assets and Liabilities

It is time to repay creditors and suppliers. If you are short on money, you can sell your assets and investments at fair market value and use the proceeds to pay the liabilities. It is advisable to seek legal help to ensure all liabilities are paid off with no future claims.

For the remaining assets, you can either sell them for cash or transfer ownership to yourself at fair market value and account for it as shareholder withdrawal. This withdrawal will be taxable to the shareholders.

Settle Shareholder Account

If there are any retained earnings in your balance sheet, they have to be distributed among shareholders as dividends. These dividends are taxable to shareholders. The calculation of this distribution and the tax implications are slightly complex and is better left to a professional. An expert tax adviser can help you collect dividends in a tax-efficient manner.

If there are any retained losses in your balance sheet, shareholders can use them to offset their investment income and personal income. If the losses are more significant than personal income, shareholders can carry these losses forward for 10 years or back them by three years.

If you have withdrawn any amount as a shareholder loan, you can repay it to the business or show it as dividends.

You must file a T5 Statement of Investment Income for each shareholder with the CRA detailing the dividends paid. The shareholders will show these dividends as income in their personal income tax returns.

Corporate Tax Account

After all the parties involved have been paid and all the accounts with the CRA are closed, the final account is the corporate tax return. You file a tax return when you cease operations. When you are dissolving the company, you file a final tax return, which should be a nil return. If the duration between ceasing business operations and dissolution is longer, you can keep filing nil returns.

When you file your final returns, you have to give notice of dissolution. Upon receipt of these documents, the CRA will automatically close your Information Return and Corporate Tax accounts, and your business will officially shut down.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Business Shut Down

A skilled accountant can help you plan your business dissolution tax-efficiently. At Edelkoort Smethurst CPAs LLP, our tax experts and accountants can help settle GST, payroll, and investment return accounts to ensure you are not missing out on any refunds. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with accounting and tax planning expertise, contact us online or by telephone at 905-517-2297.