CLOSING A BUSINESS Every day, businesses are sold, business owners retire or die or, sometimes, a business is not the success that was anticipated and owners decide to cut their losses and wind things up. When a business changes hands or closes, whatever the reason, many of the same legal and tax requirements apply, and many of the same steps and procedures must be followed. Where a business closes because of a bankruptcy, either personal or corporate, many of the requirements outlined below must be fulfilled, but the overall process is a great deal more complex and professional advice is mandatory. WHERE TO START? Two factors — and the interaction of those factors — determine the steps that need to be taken when a business is closed, or when there are significant changes to its organization. The first is the nature of the business itself — whether it has been carried on as a sole proprietorship, a partnership or a corporation. The second determining factor is the reason for the change. Different rules can come into play when a business is being sold, as opposed to those that apply when a business owner dies. Each of these situations brings a slightly different set of rules into play. These rules are summarized below. SOLE PROPRIETORSHIP A sole proprietorship is the easiest type of business to set up and, not surprisingly, the easiest to wind down. Closing a Business Operating as a Sole Proprietorship A sole proprietor who operates a business cannot really “sell” the business in the usual sense of that word. Where a business is operated as a sole proprietorship, and the sole proprietor ends his or her involvement with the business, that business is closed. The assets of the business may be purchased by another person, but the business run by that purchaser is, for all tax and legal purposes, an entirely new business. The departing sole proprietor must close all accounts that the business has with the Canada Revenue Agency (CRA). Typically, this would include a Business Number (BN), a payroll account (where the business has employees) and a Goods and Services Tax/Harmonized Sales Tax (GST/HST) account. To cancel a BN, Form RC145, Request to Close Business Number (BN) Accounts should be completed and filed with the CRA. That form can also be used to cancel payroll accounts and GST/HST accounts held by the business. The CRA office to which Form RC145 is sent will differ depending on the geographic location of the business. Generally, it is filed with one’s local Tax Services office; however, this practice is not uniform across the country and business owners who need to file the RC145 should contact the CRA’s Business Window service at 1-800-959-5525 to confirm the address of the appropriate office. Alternatively, the addresses of each of the CRA’s Tax Services offices can be found on the Agency’s Web site at http://www.cra-arc.gc.ca/contact/tso-e.html. A sole proprietor who has employees must, in addition to cancelling the payroll account, prepare and file T4 slips for each of the employees, as well as a T4 summary that covers all employees, and send those to the following address within 30 days: Ottawa Technology Centre 875 Heron Road, OTTAWA, Ontario, K1A 1A2 Any business that has employees must, of course, deduct and remit income tax, Canada Pension Plan and Employment Insurance amounts from the employees’ wages, and remit those amounts to the CRA. Where a sole proprietorship is closing, all such amounts outstanding must be sent to the CRA within seven days of the day the business ends. The sole proprietor must also prepare and file any outstanding GST/HST returns covering the period up to the time the business closed, and any GST collected on sales but not yet sent to the CRA also must be remitted. The books and records kept by the business must be retained after the business itself closes. The time period for which the books and records must be kept varies, depending on the situation, as follows: • f the business owner filed his or her tax return on time, a minimum of six I years after the end of the tax year to which it relates. • f the business owner’s tax return was filed late, six years from the date the I return was filed. • f the business owner filed an objection or appeal, until either the issue is I settled and the time for filing any further appeal expires, or the six-year period mentioned above has expired, whichever is later. Death of a Sole Proprietor Where a person who has run a business as a sole proprietor dies, all of the steps outlined above must be taken and some additional requirements, mostly in the nature of final tax returns, come into play as well. Where a business is operated as a sole proprietorship, any income generated by the business is taxed in the hands of the owner of that business. Consequently, the personal tax return of the business owner is also, in effect, the tax return for the business. As is the case for all taxpayers, income tax returns for the year of death (and any returns not filed for previous years) will have to be filed with the CRA by the deceased’s legal representative, usually the executor or administrator of the estate. The date by which that final return has to be filed depends upon the date of death, as shown in the chart below. Date of Death Filing Deadline January 1 to December 15 June 15 of the following year December 16 to December 31 Six months after the date of death Where a sole proprietor dies after the end of a taxation year, but before filing a return for that year, the filing due date is six months after the date of death. For example, if a sole proprietor of a business died on February 28, 2006, without having filed his or her 2006 tax return, that return, as well as any taxes owing, would be due on August 31, 2006 — six months after the date of death. Any income taxes owed by a sole proprietor on a final return have their own due date, which is, in some instances, different than the return filing due date. The tax payment deadlines are as follows: Period when Death Occurred Due Date for Balance Owing January 1 to October 31 April 30 of the following year November 1 to December 31 Six months after the date of death Along with the required income tax returns, final GST/HST returns for the business must be filed. When a sole proprietor dies, his or her final reporting period as a registrant is considered to end immediately before the day he or she ceased to be a registrant. Take, for example, the case of a sole proprietor whose fiscal year is January 1, 2006 to December 31, 2006, and who usually reported on a quarterly basis. Where that sole proprietor dies on November 12, the final reporting period would be November 1, 2006 to November 12, 2006, even though the actual reporting period would usually end on January 31, 2007. PARTNERSHIPS Closing a Business Operating as a Partnership Where all of the members of a partnership decide to close the business carried on by that partnership, many of the same steps outlined above for closing a sole proprietorship must be taken. For example, the partnership must cancel its business number and GST/ HST registration using Form RC145, Request to Close Business Number (BN) Accounts. If the business carried on by the partnership had any employees, all income tax, Canada Pension Plan and Employment Insurance amounts deducted from the employees’ wages must be remitted to the CRA within seven days of the day the business ends. As well, a T4 slip must be prepared for each employee, together with a T4 summary covering all employees, and those must be sent to the CRA’s Ottawa Technology Centre (see above address) within 30 days of the day the business ends. All outstanding GST/HST returns must be filed, and any GST collected, but not yet remitted, must be paid to the CRA. As with a sole proprietorship, the books and records of the business carried on by the partnership must be retained for a period of time. Generally, that period of time is six years. Departure or Death of a Partner Where a partner dies, determining whether the business can continue as before depends on a number of factors. Where originally there were only two partners, the remaining partner, should he or she decide to keep the business running, will either have to run that business as a sole proprietorship or bring in a new partner or partners. In the event that the remaining partner decides to run the business on his or her own, the partnership has ended and a new business has effectively been started. In that case, the business number and other CRA accounts of the partnership must be closed and new accounts opened for the sole proprietorship. If the remaining partner decides to take in a new partner or partners, the fate of the existing business accounts will depend on the terms of the partnership agreement that governed the first partnership, and whether the business was registered using the legal names of each partner or the provincially registered partnership operating name. Some partnership agreements will provide for the departure (or death) of a partner and the admission of new partners, while others may provide that on the departure or death of any of the founding partners, the partnership will cease to exist. If the original partnership does cease to exist and a new partnership is created to run the business, all the filings which were put in place for the original partnership — for example, registering for business number and registering for GST/HST purposes — must be cancelled and new ones created for the new partnership. In the case of a partner’s death, the same income tax returns that are required on the death of any taxpayer must be filed, and the filing and tax payment due dates are the same as those imposed on sole proprietors. A summary of when the required returns must be filed and when any tax amounts owing must be paid can be found in the above section on Sole Proprietorship. CORPORATIONS Winding Up a Business Carried On by a Corporation Corporations are the only business entities that have a legal existence entirely separate and apart from that of the individuals running the business. In effect, a corporation is a legal “person” in its own right, and that separate legal existence creates its own set of obligations when a corporate business is wound up. As with any other type of business that is coming to an end, it is necessary to cancel any accounts that have been opened with the Canada Revenue Agency; specifically, the corporation’s business number, payroll accounts, corporate income tax account, and GST/HST account must be closed using Form RC145. T4s must be prepared for any employees of the corporation, and, along with a T4 summary, the T4s must be filed at the Ottawa Technology Centre (address above) of the CRA. Any amounts withheld from employees’ wages, but not yet remitted to the CRA, must be sent in within seven days of the day the business closes. A final GST return and an income tax return for the corporation must be prepared and filed. The separate legal existence of the corporation means that some additional steps are required. In order to permanently end the corporation’s existence, it is necessary to send an application for dissolution to the government body that governs the affairs of the particular corporation. That government body may be either federal or provincial, depending on the type of corporation involved. Where, as is usually the case, the original incorporation was done by or with the help of a lawyer, that person will have the information needed to accomplish the dissolution. Once articles of dissolution have been received from the particular government body, a copy of those articles of dissolution should be sent to the CRA. This is an important step as, if the CRA is unaware of the corporation’s dissolution corporate tax returns will be required on an ongoing basis. Departure or Death of a Shareholder or Director The independent legal existence of the corporation means that, unlike a sole proprietorship or a partnership, the death of any of the business principals does not threaten or undermine the continued existence of the corporate business. While the CRA, as well as the government body that governs the affairs of the corporation, will have to be notified, particularly of any change in the composition of the corporate Board of Directors, a change in directors or shareholders should not affect the continuing operations of the corporate business in any significant way. CONCLUSION The CRA issues a number of publications that deal, in whole or in part, with the issues that arise when a business is to be closed — a partial list of these publications follows: Business and Professional Income http://www.cra-arc.gc.ca/E/pub/tg/t4002/t4002- e.html. General Information for GST/HST Registrants http://www.cra-arc.gc.ca/E/pub/gp/rc4022/rc4022- e.html. Request to Close Business Number Accounts http://www.cra-arc.gc.ca/E/pbg/gf/rc145/README.html. Books and Records — Retention and Destruction http://www.cra-arc.gc.ca/E/pub/tp/ic78-10r4/README.html. Request for Destruction of Books and Records http://www.cra-arc.gc.ca/E/pbg/tf/t137/README.html. Preparing Returns for Deceased Persons http://www.cra-arc.gc.ca/E/pub/tg/t4011/t4011-e.html. In addition to these forms and publications, the Agency’s Web site provides a wealth of additional information. In particular, the Web site includes a section entitled Changes to your business, which can be found at: http://www.cra-arc.gc.ca/tax/business/topics/life-events/menu-e.html.