Business Operations stopped end of July 2023 (retail store closed - pandemic).
Assets: sold/recycled/disposed (except cash - bank account) Loans: paid off (except Shareholder loan - credit position) RP/RTaccounts: closed and paid
Business had loss in 2023: Schedule 4 will be completed for loss carry back
Fiscal year → calendar year
As of December 31, 2023:
-Little over $20,000 in the business account - cash
-Little over $35,000 Shareholder loan account (credit)
-Loss carryback will generate around $5,000.00 in refunds (2023 Loss: -$55k & 2021: $45k in profit).
Approximation: Fees to close business + receives loss carryback refund + pays whatever remains in the bank account toward SH loan balance = around $10,000 owing in SH loan account.
My thoughts are $10k owed to shareholder is booked to “Other Revenue” - GIFI 8230 (debt forgiven)
Business used those funds from SH for: Supplies, Rent, Renovations, etc.
Would this just go into income or does Section 80 come into play?
1. Is it necessary to complete two T2s (2023 and 2024 shortened year) or will just the 2023 return be sufficient? To clarify I have not filed the 2023 T2 yet (in progress).
I only ask because I don’t want to bill more fees than I have to period - let alone to a business that has already struggled.
2. On a side note if anyone can briefly discuss if there is a potential to claim an ABIL on the (sole) Shareholders T1?
Not enough info to fully analyze - need to see the balance sheet - but typically no - the shareholder loan should offset any remaining balance in shareholder equity (i.e. expect a debit balance in retained earnings).
There is a reason Section 80 exists, but it doesn’t apply in this situation. And, it would not be appropriate to move the shareholder loan balance to income - at least, not taxable income. It’s not like the corporation received a tax deduction when the shareholder contributed those funds. And, as income, it would be closed to retained earnings - so might as well just post it directly there.
If there is no further activity in the corporation after Dec 31, 2023, then why file another T2 after that date?
You can try, but CRA will want proof of the contributions (showing dates, amounts, etc), and documentation to show that the loans were made in expectation of earning a return on that investment - not just that the balance arose in the normal course of business (the shareholder purchasing things on behalf of his company, or transferring funds because the corporation was low on cash, etc.).
Ceasing business doesn’t relieve the company from having to file corporate tax returns. The company can go through a dissolution process but a December 31, 2023 T2 would have to be filed as well as another T2 up to the dissolution date.
From what you’ve presented, I would think there is a potential ABIL claim. Has the shareholder ever claimed a capital gains deduction? This would limit the ABIL. In my experience, CRA reviews every ABIL claim so make sure you tell your client that you’ll need proof (copies of cheques, journal entries, etc) of the transactions that created the shareholder loan debt and the stated capital. Also prepare your client for the bill for claiming and substantiating the claim. The client should, at the very least, have a capital loss to claim on their 2023 T1.
What specifically on the balance sheet should I be analyzing? Not much left on BS with most assets and liabilities gone except for business bank balance and SH loan.
Book a journal entry like the below?
Debit Shareholder Loan $10,000
Credit Retained Earnings $10,000
Transactions after December 31, 2023:
-Invoice for corporate tax return and payment
-Invoice and payment to lawyer - dissolution (should SH choose to not do it on their own)
-Refund from loss carry back
@Nezzer@kevin
Do above transaction justify another corp tax return for 2024?
I believe the client and I can produce the proof of contributions.
In terms of showing loans were made with an expectation of earning a return - the business was profitable eventually (I believe in year 3) but the pandemic ended that.
However, I would also say the money was invested by the owner in the normal course of business just like you mentioned - buying things on behalf of the company and transferring funds to the bank account to cover the costs of running the business.
Thanks for heads up. Taxpayer would benefit from the ABIL. They disposed of a rental property in 2023. They had a significant gain. They were instructed when they received the funds from the sale of the property to put aside significant amounts for tax.
If my preliminary thoughts are correct only half the SH loan loss will be applied to the taxpayers T1. So with the SH loan being around $10k a $5k ABIL will not make a massive difference but something is better than nothing.
Thank you both for your incredibly helpful replies. I am very appreciative for the knowledge being shared.
The benefit of the ABIL is to deduct 50% of the loss against income other than capital gains. Since your client will be able to deduct his allowable capital loss against the 2023 capital gain from the sale of the rental property (and likely without having to prove his loss to CRA), are you getting any benefit in trying to claim this as an ABIL? You’re still only saving tax on 50% of the loss, whether it’s an ABIL or a plain old capital loss.
That’s true but it assumes the lawyer actually filed the Articles of Dissolution with the corporations branch of the applicable Province. CRA doesn’t acknowledge a dissolution until the Articles of Dissolution have been processed by the Province.
Careful, though. Just did a final T2 carrying back a loss to get a 61K refund. Lawyer filed dissolution without consulting. Took months to get the refund issued to the shareholder.
Yes, you are correct. Sorry - I answered too quickly. I was just suggesting that if everything had been completed prior to year-end (dissolution, etc) why file a “full year” T2 for Dec 31, 2023 and then another T2 on Jan 1, 2024 just to report the dissolution?
Bank balance will increase once T2 for 2023 is filed via a loss carryback refund.
Shareholder will have to pay a few invoices (one/two for filing taxes and for dissolution) then the remainder of the bank balance will be used to repay the SH loan as much as possible.
The corp will not have sufficient amounts in bank balance to completely pay off the SH loan so the remaining SH loan balance will be closed out to retained earnings as @Nezzer mentioned.
@Nezzer@kevin RE: ABIL
I won’t know exactly how much client lost (I can approximate) until corp is dissolved in 2024 - still some moving pieces:
My invoice - 2023 & 2024 T2’s
2023 loss carryback refund
My thought is he’ll be in a higher marginal tax bracket in 2023 vs 2024 (because the sale of a rental property in 2023).
So claiming the ABIL on 2023 T1 would ideally be more beneficial.
There’s an argument that the corp was insolvent in 2023.
But I may have better luck with the claim on the 2024 T1 because the balance sheet will be clean in 2024.
Can anyone comment:
Which year the ABIL should be claimed on the T1 (2023 or 2024)?
As I mentioned earlier, if your client has a large 2023 capital gain from the sale of a property outside the company, why go through the ABIL process? You get the same benefit by claiming the capital loss against the capital gain without the problem of putting together the documentation for CRA to backup the ABIL.
You can claim the capital loss on the shareholder loan and shares in 2023 since the company is insolvent. You can claim the balance of the capital loss from the company in 2024 once it’s wound up. That capital loss could be likely carried back against the 2023 capital gain. Again, no need to do the ABIL dance.
An ABIL is great when you have a qualifying capital loss but no capital gains. The ABIL allows you to apply the loss to other income. But when you DO have a capital gain from another source, I don’t see why you would worry about claiming it as an ABIL.
One of my clients is in the same boat. Bank balance is not enough to cover Loan due to shareholder. Apart from credit the difference to Retained Earning, there is nothing we can do to claim back this amount for the client personally?
If the corporation is officially dissolved, it can’t legally have a bank account, and can’t technically have balances of any kind. I would assume that everything “left over” got closed out on the date of dissolution.
As for your invoice, for your services, does it matter who pays it? I would not record it in the corporate records at all. Give it to your client (i.e. the human) and let them decide who will pay it.
Correct corp was dissolved and corporate bank account were closed on same day.
For final 2024 T2 return invoice (T2 will be filed shortly) SH will pay it (because corp will be dissolved) and I plan on booking an accrual to account for expense on final T2.
Journal entry dated for the day of dissolution
Debit Professional Fees XXXX
Credit Shareholder loan XXXX
Invoice date for the final T2 billing will be the day it is filed.