By Heath Campbell
A time may come in the life cycle of the business where a corporation needs to end – legally known as a “corporate dissolution”. We have seen many of these in our practice, both at the Ontario and federal level.
Because at WRD we tend to favour federal corporations, we thought it would be useful to write down a few comments about the federal dissolution process. In this entry, we are going to focus on voluntary dissolutions.
What is Voluntary Dissolution?
Under corporate law, a corporation is a separate and distinct legal person and survives the death of its owners (i.e. the shareholders). However, there are times when the shareholders decide the corporation is no longer serving a useful purpose and opt to terminate its existence. This is considered a “voluntary dissolution” as opposed to other situations where:
- a government entity prematurely revokes or cancels a corporation’s legal existence (for instance, when the corporation has failed to make its mandatory company filing.); or
- the creditors of the corporation or a court demand that the corporation wind-up or liquidate its operations.
Once dissolved, the corporation is classified as inactive, no longer has status as a separate “person”. It is, for all intents and purposes, dead.
Why Would I Voluntarily Dissolve a Corporation?
The common reason is because a tax advisor (i.e., an accountant or tax lawyer) advises you to dissolve. Dissolutions are a common practice as part of a tax-driven corporate restructuring.
Another common scenario is where the corporation is part of an estate. If the estate trustee cannot sell the business, then it may need to distribute its assets and dissolve the corporation to wrap up the estate’s affairs.
Finally, the shareholders of a corporation may decide to dissolve it simply because they have no further need to keep it alive. This can occur for any number of reasons but a common one is that the owner(s) is (are) retiring and cannot find a buyer for the business. Occasionally, a corporation may be formed but remain dormant, leading to unnecessary costs, obligations, and confusion.
How Do I Voluntarily Dissolve a Corporation?
Dissolving a corporation is a legal process that requires careful execution. Below is a basic summary of the process.
Dissolving a federal corporation requires the approval of shareholders holding two-thirds of shares in the corporation. If the corporation has different “classes” of shares, all shareholders of all classes, regardless of their voting rights for other matters, are permitted to vote as a class on the question of dissolution, and each class must approve the dissolution by a two-thirds majority.
A corporation must settle its debts and obligations or obtain creditors’ permission to leave the debt unpaid before it may dissolve. Furthermore, debts must be settled before any of the corporation’s assets are distributed to the corporation’s shareholders. The corporation must also give notice to each creditor of the corporation that it intends to dissolve, give notice in each province where the corporation carried on business, and cease to carry on any further business, except as is necessary to settle its debts and obligations.
The corporation must file a final tax return for the year in which the corporation is dissolving, as well as any outstanding tax returns from prior years, even if the corporation has no taxable income for the year of dissolution. It can also be useful to obtain a clearance certificate from the Canada Revenue Agency (CRA) before proceeding with the dissolution. However, because clearance certificates are not necessary, we, as corporate counsel, tend to defer to the expertise of the corporation’s accountants or tax professionals on whether a certificate is useful in a given situation.
If a corporation distributes its assets to shareholders while it still owes money to a creditor (including the CRA), those creditors can sue the corporation after it has been dissolved and may also collect this unsettled debt from the shareholders who received payment.
Splitting the (Remaining) Pie
Once the corporation’s debts and obligations, including taxes, have been accounted for, it is time to distribute the remaining assets to shareholders. Determining the process of distribution, including any priorities that one share class may hold over another, involves reviewing the corporation’s governing documents and share-related records located in its Minute Book.
At this stage, the corporation should sell and properly transfer title to any remaining property it owns and divide the cash value of the proceeds of sale to its shareholders and creditors.
Vesting in Crown
It is crucial that every item of property (including money) be distributed prior to articles of dissolution being filed.
If not, then section 228 of the Canada Business Corporations Act applies, making that undistributed property vest in Her Majesty in right of Canada. That means that once the articles are filed, ownership in any property still in the corporation is automatically transferred to the Canadian federal government. The chances of ever getting that property back are slim. We note that the Business Corporations Act (Ontario) has a similar provision vis-à-vis provincial corporations and the provincial government (see section 244).
This is not well known and can take the average business owner by surprise.
Articles of Dissolution
Once the remaining assets have been distributed, the corporation will submit articles of dissolution to Corporations Canada declaring that the steps in the dissolution process have been completed and conform to the law. Corporations Canada will then confirm its approval of the articles of dissolution by issuing a certificate of dissolution, the receipt of which marks the completion of the dissolution process for the corporation.
Guiding Your Journey
Shutting down (and ultimately dissolving) an active federal corporation is not necessarily complicated. However, it still requires some planning. There are the approvals, payouts and transfers mentioned above. Plus, you may need to incur some “closing” costs to terminate staff and end third party contracts (like leases or franchise agreements). Finally, there is the added need to move or dispose of any hard assets like furniture or computers.
The bottom line is that if you are looking to dissolve your federal corporation, do not try to rush the process. Instead, step back and take a breath. Then prepare a plan, come up with a budget and go step-by-step. It may take a little longer, but is a small delay really such an inconvenience when what you get in return is peace-of-mind!