Principal Issues: Whether a corporation resident in Canada must file a final income tax return up to the date of its dissolution, or whether such corporation can stop filing income tax returns after its assets are distributed and its liabilities assumed, even if it is not yet dissolved for corporate law purposes.
Position: Under the Income Tax Act, a corporation resident in Canada must file a final income tax return up to the date of its formal dissolution under corporate law.
Reasons: Wording of the Act and previous positions.
July 5, 2005
Jonquière Tax Centre Income Tax Rulings Directorate
2251 René-Lévesque Blvd.
Jonquière QC G7S 5J1 S. Prud'Homme
(613) 957-8975
Attention: Ms. Josée Savard
2005-013267
Request for Opinion - Filing of Income Tax Returns - Dissolving Corporations
This is in response to your emails of May 24 and 25, 2005, in which you requested our opinion on the requirement for dissolving corporations to file income tax returns for purposes of the Income Tax Act (the "Act").
Unless otherwise indicated, all statutory references herein are to provision of the Act.
1) Particular Situations
You have presented us with the two situations described below (i.e. the "First Particular Situation", the "Second Particular Situation", and collectively the "Particular Situations") in the context of your request for an opinion.
First Particular Situation
A particular corporation ("Xco") ceased its operations in 1999. The shareholders and managers of Xco did not take all the necessary steps to wind up and dissolve Xco. However, the regulatory authority automatically dissolved Xco in 2005.
Second Particular Situation
A particular corporation ("Yco") ceased operations in 2000. Yco was wound up during 2000. The regulatory authority issued a certificate of dissolution for Yco in 2001.
Elements common to the Particular Situations
We understand that each of Xco and Yco were incorporated in Canada after April 26, 1965. As a result, and pursuant to paragraph 250(4)(a), each of Xco and Yco were deemed for the purposes of the Act to have been resident in Canada throughout the relevant taxation years. We also understand that, at all relevant times, neither Xco nor Yco was a "registered charity" within the meaning of the definition in subsection 248(1).
2) Your Questions regarding the Particular Situations
You wish to know whether each of Xco and Yco had an obligation under the Act to file income tax returns for a period up to the date of their dissolution, or whether such an obligation ceased when they become inactive.
3) Our Comments on the Particular Situations
Subparagraph 150(1)(a)(i) provides that a return of income that is in prescribed form and that contains prescribed information shall be filed with the Minister, without notice or demand for the return, for each taxation year of a corporation, by or on behalf of the corporation within six months after the end of the year if any of the following is applicable:
- the corporation is resident in Canada;
- the corporation carries on business in Canada, unless its only revenue from carrying on business in Canada in the year consists of amounts in respect of which tax was payable by it under subsection 212(5.1)
- the corporation has a taxable capital gain; or
- the corporation disposes of taxable Canadian property.
Furthermore, the winding-up of a corporation does not result in a deemed year-end for the purposes of the Act, except for certain very specific purposes (for example, refer to paragraph 88(2)(a), which deems a year-end of a corporation that is wound-up for the purposes of computing certain tax accounts).
Legally, it is the applicable corporate law that will determine how a corporation ceases to exist. Generally, the "winding up" of a corporation (i.e. the distribution of its assets to its shareholders and the assumption of its liabilities by those same shareholders) or the cessation of operations of a corporation does not technically terminate its existence. Such a corporation continues to exist until the regulatory authority formally terminates its existence. Generally, corporate laws provide that the regulatory authority issues a certificate of dissolution in respect of a particular corporation, and that particular corporation then ceases to exist on the date shown on the certificate of dissolution.
Based on the foregoing, we are of the view that, in the First Situation, Xco would have an obligation, for the purposes of the Act, to file income tax returns for the 1999 to 2004 taxation years inclusive. Xco would also have an obligation to file a final return of income for the period commencing after the end of the 2004 taxation year and ending on the date of dissolution of Xco in 2005.
We are also of the view that, in the Second Circumstance, Yco would have an obligation, for the purposes of the Act, to file an income tax return for the 2000 taxation year. Yco would also have an obligation to file a final income tax return for the period beginning after the end of the 2000 taxation year and ending on the date of dissolution of Yco in 2001.
As you point out, based on the above position, it is possible that a final tax return of a particular corporation may only cover a short period (in some cases a few weeks, in other cases only a few days). Technically, this final income tax return must still be filed under the Act.
In closing, we draw your attention to the fact that the comments on line 078 in Chapter 1 of the most recent version of the T2 Corporation -- Income Tax Guide (T4012), as well as the note on Section D of Form RC145 - Request to Close Business Number (BN) Accounts, indicate that a corporation must file a final income tax return for the period up to the date of its dissolution.
Should you require further information on this subject, please do not hesitate to contact us.
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch