CLOSING THE BUSINESS

Closing a sole proprietorship, whether because the owner stops working, sells the business or retires, has income tax, GST/HST, payroll and administrative consequences. Many of them are triggered by the fact that the business's assets are either sold or kept by the owner for personal use. This page sets out what happens to inventory, equipment and receivables when the business ends, the final income tax return, closing the GST/HST and payroll accounts, cancelling registrations and contracts, selling the business instead of winding it up, and how long records must be kept afterwards.

THE FINAL INCOME TAX RETURN

• Final fiscal period: the business's last fiscal period ends on the day it stops operating. Income to that date is reported on Form T2125 in the T1 return for that year, with the box for the last year of business ticked.

• Non-calendar year-ends: if the business used an off-calendar year-end, no new additional business income is added in the final year, and the prior year's amount is deducted. This is explained on the Fiscal Period page.

• CPP: CPP contributions are still calculated on net self-employment income for the final period.

• Losses: a loss in the final year can be applied against other income and carried back three years or forward under the normal rules. Unused business-use-of-home expenses, however, are lost when the business ends.

INVENTORY

• Sold in winding up: proceeds from selling off remaining stock, including at a discount, are business income in the final period.

• Kept for personal use: inventory the owner keeps is treated as sold at its fair market value, and that value is included in income.

• Written off: stock that is thrown away or has no value reduces closing inventory, increasing cost of goods sold.

EQUIPMENT AND OTHER CAPITAL PROPERTY

• Sold: the lower of the proceeds and original cost is subtracted from the CCA class. A negative balance is recaptured into income; a positive balance with no property left in the class is a terminal loss.

• Kept for personal use: converting business equipment or a vehicle to personal use is treated as a sale at fair market value, with the same recapture or terminal loss results.

• Gains: proceeds above original cost, and the sale of goodwill, produce capital gains reported on Schedule 3.

• Home: if part of the home was used for the business and no CCA was claimed, there is usually no tax consequence when the business use stops.

ACCOUNTS RECEIVABLE

• Collected after closing: amounts already included in income are not taxed again when collected.

• Uncollectible: amounts that cannot be collected can be deducted as bad debts, and the GST/HST on them recovered.

• Sold with the business: on a sale, receivables can be transferred to the buyer with a joint election on Form T2022, letting the buyer deduct any that later go bad.

GST/HST

• Final return: file the last GST/HST return, reporting all sales up to the closing date.

• Deemed sale of assets: when a business stops being registered, it is generally treated as having sold the property on which it claimed input tax credits at fair market value, and must remit GST/HST on that value.

• Closing the account: ask the CRA to close the GST/HST account once the final return is filed and any balance paid.

PAYROLL

• Final pay and Records of Employment: pay all wages and vacation pay owed and issue ROEs, as set out on the Ending Employment page.

• Final remittance: remit the last source deductions by the normal due date.

• T4 slips: when a business stops operating, T4 slips and the T4 Summary are due within 30 days of the closing date, rather than at the end of February.

• Closing the account: close the payroll program account once everything has been filed and paid.

REGISTRATIONS, CONTRACTS AND INSURANCE

• Business name: cancel the provincial business name registration so the name is no longer listed in the owner's name.

• Licences and permits: cancel municipal and provincial licences, and return or destroy any permits that must be surrendered.

• Leases and contracts: give notice under the terms of premises leases, equipment leases and supplier contracts. The owner remains personally liable for obligations that continue after closing.

• Insurance: cancel policies no longer needed, but consider keeping professional liability "tail" coverage, because claims-made policies only respond to claims made while the policy is in force.

• Bank accounts: keep the business account open until the last receipts and payments have cleared.

SELLING INSTEAD OF CLOSING

• Asset sale: a sole proprietorship is sold by selling its assets. The price is allocated among inventory, equipment, goodwill and other assets, and each is taxed under its own rules.

• GST/HST election: where substantially all the assets of the business are sold to a registered buyer, a joint election can be made so that no GST/HST is charged on the sale.

• Non-competition covenants: an amount received for agreeing not to compete has its own tax rules and should be addressed in the sale agreement.

• Lifetime capital gains exemption: it does not apply to assets sold by a proprietorship, which is one reason some owners incorporate before selling.

RECORDS AFTER CLOSING

• Retention: books and records must generally be kept for six years after the end of the last tax year to which they relate.

• Earlier destruction: records can be destroyed before then only with the CRA's written permission.

• Death of the owner: different rules apply, including a deemed disposition of capital property and possible optional returns. The executor should obtain professional advice.

KEY POINTS

• Assets do not disappear: inventory and equipment kept by the owner are treated as sold at fair market value.

• GST/HST on deregistration: tax may be owed on assets kept when the account closes.

• T4s within 30 days: when payroll ends because the business closes.

• Cancel and keep: cancel registrations and contracts, but keep records for six years.

SOURCES

• Canada Revenue Agency: Closing a business, and Guide T4002, Chapter 1.

• Canada Revenue Agency: Guide RC4022 (closing a GST/HST account) and Guide RC4120 (T4 filing when a business stops operating).

• Income Tax Act: sections 13, 22, 23, 45 and 230.