Tax Tip Thursday

I want to talk about keeping your corporation current and the implications of not keeping it that way!

We encounter this on a fairly regular basis.

There are 2 filings that you have to complete every year to keep your corporation current.

1. Your T2/Corporate Tax return is required to be filed every year.  Even if it is zero income, you need to file it.
2. Your Annual return.  This is NOT a tax return.  This is an information return that needs to be filed annually.  It is mandatory.

In both cases, if you do not file your returns, you stand the possibility of having your corporation closed.  It is called an Involuntary Dissolution.

This can cause you a great deal of problems.

For a federally incorporated Canadian corporation, an involuntary dissolution does not eliminate the obligation to file outstanding corporate tax returns with Canada Revenue Agency.

This is true even if the corporation was dissolved by Corporations Canada for failure to file annual corporate filings under the Canada Business Corporations Act.

There are two separate legal regimes:

• Corporate law compliance (Corporations Canada)
• Tax compliance (CRA)

A federal dissolution under the CBCA does not cancel federal tax obligations.

Generally, the dissolved corporation must still:

• file all outstanding T2 corporate income tax returns,
• file GST/HST returns,
• file payroll remittances and T4s if applicable,
• pay any taxes, penalties, and interest owing.

Important points:

 

Dissolution does NOT equal tax forgiveness

CRA can still:

• require filings,
• issue arbitrary assessments,
• charge penalties and interest,
• pursue collections against remaining corporate assets,
• assess directors personally in certain cases.

 

The corporation can continue to exist for tax administration purposes

Even though dissolved corporately, CRA may still maintain:

• the BN (business number),
• T2 accounts,
• GST/HST accounts,
• payroll accounts,

until properly resolved.

 

Directors may still have liability

Directors can remain personally liable for:

• unremitted payroll source deductions,
• some GST/HST liabilities,
• improper distributions,
• certain post-dissolution conduct.

 

Filing old returns is often still worthwhile

Even after dissolution, filing can:

• reduce arbitrary assessments,
• stop continuing non-filer issues,
• establish losses,
• help close CRA accounts,
• assist if the corporation is later revived.

What I see as the biggest issue, is that quite often if you do not file a tax return, the CRA will do what is called an arbitrary assessment.  And it is always a ridiculously high assessment.  The problem is that you now owe that money until you file a tax return changing the arbitrary assessment.

We have a specific situation right now where a client had an arbitrary assessment, was really doing business through the corporation, but had not filed the returns for 2 years.

They want to file the outstanding tax returns and then close their corporation.

When we tried to file the Corporate tax return, the account was closed.

We now have to revive the corporation before we can file the tax return.

This is going to cost the client more fees as well as more penalties and interest due to the delay in filing the returns.  And now they have to open the corporation just to file the tax returns and close the corporation.

Do yourself a favour and keep your corporate filings up to date!

We have helped numerous corporations work through these dilemmas.  Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.