How to close a corporation in Quebec: procedures, taxes and implications

Closing your business is never a decision to be taken lightly. Whether it's a cessation of business operations, voluntary dissolution, or bankruptcy, it's essential to understand the process for filing and the necessary steps to avoid administrative and tax complications.

This article outlines the formalities for dissolving your business and the necessary compliance steps with the Quebec government, Revenu Québec, the Canada Revenue Agency (CRA), and the corporate registry. It also explains what business owners need to know to ensure a compliant closure of their corporation.

1. Closing a business: what are your options?

Closing a corporation in Canada involves several legal and tax formalities. Each case requires the submission of specific documents, such as a certificate of dissolution, and an official declaration to Corporations Canada, Revenue Canada, Revenue Québec, and the Registraire des entreprises du Québec (REQ).

To avoid involuntary dissolution and costly penalties, it's important to be well-informed before taking action.

Cessation of business operations:

If a business decides to cease operations, it must promptly notify tax and administrative authorities to avoid additional liabilities:

1. Deregister from GST and QST files, as well as any other excise taxes related to the company’s activities.
2. Update corporate registry records by filing articles of dissolution or simply drafting a statement of intent to dissolve your corporation.
3. Complete all legal and tax obligations, including the filing of final tax returns and settling remaining property and liabilities.

It is important to note that as long as the company is officially dissolved, it continues to exist as a legal entity, remaining registered in the corporate registry.

Dissolution of a corporation:

The dissolution of a corporation or a partnership is the legal process of deleting the company from the Registraire des entreprises du Québec (REQ) and the Canada Revenue Agency (CRA).

• Resolution to dissolve: Shareholders must approve the dissolution with at least two-thirds of votes or, in the case of a sole shareholder, through a formal resolution.
• Declaration to REQ and ARC: The corporation must file a declaration of intention to dissolve and an application for dissolution with the Quebec Business Registry.
• Finalize the process of dissolving: Upon approval, the corporation is dissolved, ceasing to exist as a legal entity.

Liquidation of a company:

The liquidation of a corporation or partnership is the process by which a company sells its assets and pays its debts before its final dissolution. To do this, the company must file a Notice of Liquidation and Closure to justify the steps taken. This notice can be sent directly online through a CRA's online service.

🚨 Please note that it is essential that the corporation must remain registered during the liquidation process until the dissolution is complete.

Bankruptcy of a corporation:

If a corporation is insolvent and unable to pay its creditors, it may undergo bankruptcy proceedings under the Bankruptcy and Insolvency Act. This procedure allows for the liquidation of remaining assets and the discharge of certain debts under the supervision of a licensed liquidator.

Depending on the legal form of the company, an important distinction is made with respect to debts:

• Corporation: Bankruptcy affects only the corporation. Shareholders are protected by limited liability, unless they have personally guaranteed debts.
• Sole proprietorship: the business owner and the business are legally one. Therefore, dissolving your business also results in personal bankruptcy, affecting personal assets.

Note that some tax debts, such as unremitted source deductions, GST/QST, and payroll taxes, may be transferred to the corporation’s directors. It is recommended to consult a business tax accountant before proceeding.

2. Administrative procedures for closing a corporation incorporated in Quebec

a) Shareholders' decision and resolution

Before taking any steps to dissolve your corporation, a formal decision must be made by the business owners—either the shareholders or the sole director.

• If your corporation has multiple shareholders, a resolution to dissolve must be passed in compliance with the corporation's articles of incorporation and the Business Corporations Act. Shareholders must approve the dissolution by at least two-thirds of the votes to validate the decision.
• If you are the sole shareholder, you can voluntarily dissolve the company on your own, but the decision must be documented in writing.

b) Liquidation of assets and payment of debts

Before you can dissolve your corporation, it is essential to:

• Sell or liquidate the corporation’s assets, including equipment, inventory, real estate, and any remaining property or liabilities.
• Settle all outstanding debts, including those owed to suppliers, employees, creditors, and tax authorities.
• Close the company’s bank accounts and ensure that all payments have been made to avoid unnecessary fees.

Importantly, if your corporation has any outstanding tax liabilities, such as unpaid taxes or withholding taxes, it is imperative that these be paid before the dissolution is initiated. If this step is not taken, the Revenue Québec and the CRA may block the dissolution process.

c) Filing final tax returns

Even if your corporation is no longer operating, it must still file a final T2 Tax Return at the federal level and a final CO-17 form at the provincial level, if applicable.

Here are the steps:

1. File the final tax return marked as "Final Return Before Dissolution."
2. Declare and pay all applicable taxes, including GST/QST, payroll taxes, and corporate income tax installments.
3. Obtain a tax compliance certificate to confirm that all tax obligations have been met before proceeding with dissolution.

Some corporations benefit from tax credits or loss carry-forwards. Consulting a business tax advisor can help you optimize tax savings before completing the dissolution.

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d) Filing for dissolution with the Registraire des entreprises du Québec (REQ)

Once all tax obligations have been cleared, the corporation can apply for official dissolution by submitting the required documents to the corporate registry:

• Complete and submit the Articles of Dissolution (RE-602) with the corporate registry.
• Provide proof of the dissolution resolution, which was passed at the initial decision stage.
• Pay the necessary administrative fees to finalize the corporation’s dissolution process.

Once approved, the corporation is dissolved and will cease to exist as a legal entity in Quebec.

e) Closing tax accounts and business licenses

After the dissolution, it is necessary to:

• Cancel its tax numbers (GST/QST) with Revenue Québec and the CRA to prevent additional tax liabilities.
• Close all government accounts related to the company, including business payroll accounts and corporate tax accounts.
• Cancel or close business licenses and registrations, depending on the corporation’s business activity and its obligations.

Once these steps have been completed, your corporation no longer operates and has fulfilled all administrative and tax obligations.

3. Tax implications of closing an incorporated business

Dissolving a corporation to cease trading involves several tax obligations that must be addressed before the company can be legally dissolved. When going through the liquidation and dissolution process, consider the following:

• Payment of outstanding taxes: The CRA and Revenu Québec require that all corporate tax liabilities be settled before they approve the dissolution of a company. Any failure to file outstanding returns may delay the process.
• Recovery of tax credits: If your corporation has benefited from business tax credits, certain amounts may need to be repaid based on the corporation’s tax records. Ensure you file annual returns correctly to avoid issues.
• Taxation of capital gains: when a company is liquidated, the sale of assets may result in a taxable capital gain.

Consult a professional advisor before filing articles of dissolution to optimize your tax situation and avoid unnecessary penalties. A tax expert can also help small business owners manage remaining property and liabilities efficiently.

4. Closing an incorporated business in insolvency or bankruptcy

When a corporation is insolvent and unable to pay its creditors, it must follow strict legal and administrative procedures to ensure a true cessation of business operations. These procedures must comply with the requirements of the Quebec government and tax authorities.

Mandatory steps to close a bankrupt corporation:

• Appoint a licensed bankruptcy trustee: A licensed insolvency trustee will oversee the liquidation process and coordinate the settlement of debts with creditors. The corporation must ensure that all business accounts are properly closed.
• Notify creditors and negotiate a repayment plan: If possible, the company may negotiate a structured repayment plan to limit financial losses and avoid additional legal proceedings.
• File current tax returns: It is crucial to file annual reports and final tax returns to avoid post-bankruptcy tax liabilities and ensure a compliant administrative closing.

If you are the director of a corporation in bankruptcy, be aware that certain tax liabilities, such as GST/QST and source deductions, may be transferred to you personally. It is therefore important to obtain tax advice before commencing bankruptcy proceedings.

Why seek assistance when closing a business?

Closing a business in Quebec involves numerous administrative and tax formalities that vary depending on whether you're closing, liquidating or going bankrupt. In each case, specific documents must be filed and procedures followed with government agencies, including Revenu Québec, the Canada Revenue Agency (CRA) and the Registraire des entreprises du Québec.

Without proper planning, you could be paying expenses while the business is no longer generating income, have outstanding tax liabilities, or encounter complications with taxes still owed.

Do you need tax advice on the closure of your business? Contact us today!