61 What are the tax implications of selling the assets of a business, winding up a corporation and distributing the profits to the shareholders?
Vick Manak
The sale of the assets of a business and subsequent windup (closing) of the corporation can be broken into 3 steps:
- Sale of assets of the business.
- Sell the assets of the business and record the tax implications (recapture, terminal loss, capital gains etc.).
- Have the corporation file a tax return and pay tax on these amounts.
- Settle any remaining liabilities.
- Now the corporation should really only have cash, retained earning and share capital remaining. Time to close down the business and pay out the remaining cash to your shareholders.
- Distribution of remaining cash to shareholders
- Deemed dividend equal to the funds available for distribution less the Paid Up Capital (PUC, the initial amount paid into the corporation for the shares). This amount is further reduced by any capital dividends to get the shareholder’s taxable deemed dividend
- Calculation of the capital gain or loss
- This is basically the difference between the PUC of the shares and the ACB of the shares. These amounts would only be different if the shares were purchased or sold by an individual after they were initially issued by the corporation.
- PUC > ACB = Capital Gain
- PUC < ACB = Capital Loss
- This is basically the difference between the PUC of the shares and the ACB of the shares. These amounts would only be different if the shares were purchased or sold by an individual after they were initially issued by the corporation.
Here are some terms you may find useful when addressing the windup of a corporation:
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Capital gains or losses are the appreciation or depreciation of any capital positions in a corporation for each taxation year. (39(1)) |
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Adjusted Cost Basis (ACB) is the cost of the property plus any additional expenses and investments of the financial asset for the investor, this is used to assess the amount of capital gains or losses. (ITA 54) |
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Paid Up Capital represents the cost of a corporations shares when they were initially issued. ACB will equal PUC if the shares have never been resold after initially being issued by the corporation. |
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A deemed dividend is a dividend paid out by a corporation while it is being wound-up, its paid in capital is reduced, its shares are cancelled by activity other than open market, or the paid in capital is increased without an increase in net assets or a decrease in liabilities. (84(1)) |
References and Resources:
- Income Tax Act Section 89(1),39(1),54,84(1),84(2)
- Article – “ARCHIVED – Meaning of “Winding-up”” (Author: Government of Canada)
- Article-Adjusted Cost Basis (Author: Government of Canada)
January 2020
