Dissolving a Canadian Corporation After Moving to the US

The decision to keep or wind up your Canadian corporation is a separate analysis. This guide covers the mechanics of actually dissolving it once you have decided to close. The process has a tax layer (the final T2, the deemed dividend on distribution of corporate assets, the capital dividend account election) and a corporate law layer (articles of dissolution, provincial and federal filings, clearance certificates). Both layers must be completed, and the order matters.

What is the dissolution process?

Step 1: Corporate resolution. The shareholders pass a resolution to dissolve the corporation. For a sole-shareholder corporation, this is a single written resolution.

• Step 2: Settle liabilities. The corporation must pay all debts, including outstanding taxes. If the corporation owes any tax (corporate income tax, GST/HST, payroll), those must be settled before dissolution.
• Step 3: CRA clearance certificate (Form TX19). Request a clearance certificate from the CRA under ITA 159(2). This confirms that all taxes have been paid or secured. Without the clearance certificate, the directors (and potentially the shareholders who received distributions) can be held personally liable for unpaid corporate taxes. The CRA typically takes 6 to 12 months to issue the clearance certificate.
• Step 4: Distribute remaining assets. After settling liabilities and obtaining the clearance certificate (or securing the tax liability), distribute the remaining assets to shareholders. The tax treatment of the distribution is described below.
• Step 5: File articles of dissolution. File with the incorporating jurisdiction (Corporations Canada for federal corporations, or the provincial registry for provincial corporations). The corporation is formally dissolved when the articles are accepted.
• Step 6: Final T2 return. File the final corporate tax return (T2) for the period from the start of the corporation’s fiscal year to the date of dissolution. The return must be filed within 6 months of the date of dissolution.

How is the distribution to shareholders taxed?

Under ITA 84(2), when a corporation distributes its property to shareholders on winding up, the amount by which the distribution exceeds the PUC of the shares is deemed to be a dividend.

• Deemed dividend. If the corporation has $200,000 in assets and the PUC of the shares is $100, the deemed dividend is $199,900. For a non-resident shareholder, the deemed dividend is subject to Part XIII withholding at 25%, reduced to 15% under the Canada-US treaty (Article X).
• Return of capital. The $100 PUC portion is a return of capital, not a dividend. It reduces the ACB of the shares.
• Capital gain or loss. After the deemed dividend, the shareholder is treated as having disposed of the shares for proceeds equal to the distribution minus the deemed dividend. If the ACB of the shares (after the PUC reduction) is less than the proceeds, there is a capital gain. If the ACB exceeds the proceeds, there is a capital loss.

What about the capital dividend account (CDA)?

The CDA tracks the non-taxable portion of capital gains (the 50% that is not included in income), life insurance proceeds received by the corporation, and certain other tax-free amounts. The CDA balance can be distributed tax-free to shareholders as a capital dividend (by filing an election on Form T2054 before the distribution).

• Before dissolution, elect to pay a capital dividend from the CDA. The CDA balance is lost if the corporation is dissolved without distributing it. A capital dividend to a non-resident shareholder is not subject to Part XIII withholding (it is a return of the tax-free capital gains surplus). This can significantly reduce the tax cost of the wind-up.

What about the US side?

For a US-person shareholder (citizen, green card holder, or resident alien), the Canadian corporation is a CFC (controlled foreign corporation). The dissolution triggers several US reporting events:

• Deemed dividend. The Canadian deemed dividend under ITA 84(2) is also a dividend for US purposes. It is reported on the US return as foreign-source dividend income. The Part XIII withholding is claimed as an FTC on Form 1116.
• Capital gain. Any capital gain on the disposition of the shares is reported on Schedule D. The gain is foreign-source income.
• Form 5471. A final Form 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations) must be filed with the US return for the year of dissolution. The final 5471 reports the disposition of the shares.
• Previously taxed income (PTI). If the corporation had Subpart F income or GILTI inclusions that were already taxed on the US shareholder’s return, the portion of the distribution attributable to PTI is not taxed again. This reduces the US tax on the deemed dividend, but the mechanics are complex.

What should I do next?

If you have decided to dissolve your Canadian corporation, start with the CRA clearance certificate request (it takes the longest). While waiting, determine the CDA balance and elect a capital dividend before dissolution. Model the deemed dividend and the Part XIII withholding. File the final T2, distribute the remaining assets, and file articles of dissolution. On the US side, file the final Form 5471 and report the deemed dividend and capital gain.

• Wind up vs keep your Canadian corporation, the decision framework
• CFC rules for US citizens with Canadian corporations, the ongoing US obligations that dissolution eliminates
• Selling a Canadian business before or after moving, the LCGE and timing considerations
• Subpart F income, the income inclusions that create PTI
• Form 5471: do I file it?, the annual information return

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.