Can You Dissolve An Insolvent Corporation?

The short answer: No – You cannot dissolve an insolvent corporation

Corporations

In Canada corporations are incorporated under federal legislation known as the Canada Business Corporations Act (the “CBCA”) or provincial legislation such as the Ontario Business Corporations Act (the “OBCA”).

Corporations are separate and distinct legal entities.

Is My Corporation Insolvent?

A corporation is insolvent if:

1. It is unable to pay its liabilities as they become due; or
2. It has more liabilities/debts than assets.

I Want To Dissolve My Corporation

You may no longer want to operate your corporation and dissolve it.  To dissolve a corporation means to legally end its existence.

Neither the federal CBCA or provincial OBCA allow you to dissolve an insolvent corporation.

In order to voluntarily dissolve a corporation s238(1)(c) and (2)(f) of the OBCA require that the corporation have no debts, obligations, or liabilities or the creditors consent to the dissolution.

S211(7)(c) of the CBCA similarly requires the corporation to discharge all of its obligations (i.e. debts) before it can be dissolved.  Find a copy of federal Form 19 – Statement of Intent to Dissolve below.

As you can see the signer must certify that the corporation has discharged all of its obligations (debts), and misrepresentation is a serious offence with fines up to $5,000 and/or even imprisonment.

Canada Revenue Agency

Corporations are registered with the Canada Revenue Agency (the “CRA”).  Just like an individual has a Social Insurance Number or SIN a corporation has a Business Number.  Just like Social Insurance Numbers corporate Business Numbers are nine digits long, and have different suffixes known as “Branch Accounts”

### ### ### RC0001 – Corporation Income Taxes

### ### ### RT0001 – HST (Sales Tax)

### ### ### RP0001 – Payroll Source Deductions

### ### ### RZ0001 – Information Returns (such as dividends issued by the corporation)

Corporations can have multiple Branch Accounts, but most small corporations don’t.  For example, a corporation could have RT0001, RT0002, and RT0003.

If your corporation is no longer operating, and you don’t want to have to file any more Payroll or HST returns you can file a Request to Close Business Number Program Accounts with the CRA by completing Form RC145 E.

As long as all of your corporation’s Payroll and HST returns have been filed you can close your RP and RT Branch Accounts.

However, you cannot close your RC or Corporate Income Tax Branch Account until the corporation is dissolved.  Given that, as mentioned above, you cannot dissolve an insolvent corporation this means that you will have to continue filing corporate income tax returns forever.

My Corporation Is Insolvent, I Can’t Dissolve it – What Do I Do?

1. If your corporation ceases to operate, but you can’t dissolve it you can file a T2 Short Return each year.  It is a very simple three (3) page corporate tax return.  It can look a little daunting at first, but you can probably complete and file it in just a few minutes.  If affordable it is always best to enlist the help of an accountant.
2. Assign your corporation into bankruptcy.  Unfortunately, this route comes at a cost.  Only a Licensed Insolvency Trustee can facilitate a corporate bankruptcy, and must:
   1. Advertise notice of the corporation’s bankruptcy in the newspaper
   2. Prepare a preliminary trustee report to creditors
   3. Convene a first meeting of creditors
   4. Liquidate any of the corporation’s assets
   5. Notify creditors and review creditor proofs of claim
   6. Have their fees taxed by the court
   7. Obtain their discharge via application to court

As a result, corporate bankruptcies typically start around $7,500 + HST.  Therefore, owners of insolvent corporations often leave their corporations to “languish for eternity” which is a poetic way of saying that they do nothing and never think of it again.

As long as you aren’t responsible for any liabilities as a director of the corporation, and the corporation has ceased operating, then you can more or less walk away.

Free Consultations

If you have questions about the article above, or any other insolvency matter please contact our offices at (416) 246-7771 for a free consultation.  We’d be happy to review your situation and provide free advice.