Many business owners and former business owners have inactive corporations. For example, a corporation was created but never used, the underlying business or property of the corporation was sold, or the business is inactive.
Besides saving the annual costs to file tax returns, if you are planning to dissolve your corporation and can’t recover the money you lent or invested in it, there be an opportunity to claim a tax deduction called Allowable Business Investment Loss (“ABIL”) in some circumstances.
Who must file a corporate tax return?
All corporations—including non-profit organizations, tax-exempt corporations, and inactive corporations—must file a corporation income tax returns return for every tax year, even if there is no tax payable.
What is the process to dissolve a corporation?
Is quite straightforward to dissolve an Ontario corporation with little or no assets or liabilities.
- All tax compliance filings must be brought up to date (including tax, HST, and payroll) and all outstanding balances paid;
- Request a letter of consent from the Ministry of Finance to dissolve your corporation;
- After you receive a letter of consent from the Ministry, you have 60 days to file Articles of Dissolution with the Ministry;
- After receiving your Articles Dissolution “stamped” by the Ministry, file a corporate tax return to the date of dissolution;
Assuming you are up to date with tax compliance and filing are done on a timely basis, the entire process could take as little 3-4 months.
Even though the corporation has been dissolved, the normal statutory reassessment period still applies, which means the CRA can re-open previously filed tax returns.
Dissolving a corporation with more than one shareholder and one that has assets or 3rd party liabilities requires planning as there are tax consequences and legal issues that need to be addressed. Obtaining a clearance certificate from the CRA should be considered as well.
You may be “ABIL” to get a tax deduction for an unrecoverable investment in your business
Allowable Business Investment Loss or “ABIL” is a capital loss from a disposition of shares or debt owing to a taxpayer, 50% of which is deductible. So, if you can’t recover $100,000 that you invested in your small business corporation, you can get a tax deduction on your personal tax return of $50,000. What makes this loss unique is that it can be deducted from all sources of income, not just capital gains.
The technical rules of ABIL are very complex, technical, and beyond the scope of this article, however, amongst many other requirements, it’s critical that ABIL is claimed in a timely fashion.
So, what does this have to do with dissolving your company?
While dissolving a company which you control is not, in it of itself, an indication if, or at what time, your debt became uncollectable, sustained losses or debt prior or following the sale or wind-up of your business may be an indication that an ABIL is available. However, the tax opportunity must be identified and claimed within a prescribed period.
The key to tax planning is always to plan ahead.
For more information on how to dissolve your corporation or how to get a tax deduction for unrecoverable loans or investments, call the tax professional at Sloan Partners LLP
Disclaimer: This article is intended for educational and informational purposes only. It is not intended in any way whatsoever to provide tax advice. The reader should be aware that legislation and government policies and procedures are always subject to change. None of the persons involved in the preparation of this article accepts any responsibility for its contents or the consequences that arise from its use.