I have a company who has sold its business, I need to file final T2 and dissolve the company.
They have cash on hand which is to be distriibuted to shareholders as return of paid-up capital.
I am very confused as to which order to file final T2 - file dissolution - distribute funds as I am getting very conflicting information. WOuld appreciate some guidance on which should I do first.
Balance Sheet:
Assets : Cash $100,000
Liabilities: $0
Equity:
Partners Contribution $350,000
Retained Earnings $-273,000
Net Income $23,000
They will have a total loss of 250K which may be elegible for an ABIL claim.
You’d file a T2 up to the date of dissolution, which almost always ends up being a short-period filing. Wind-up the balance sheet to the shareholder loans on the final return and if they are offside, it’s a Section 84(3) deemed dividend.
A retained earnings deficit or cumulative non-capital losses are not the deciding factor as to whether an ABIL may be claimed. You need to look at the shareholder accounts .. among other factors.
The corporation has not yet filed for dissolution, and the shareholders have now asked me to proceed with this process.
From my understanding, an application for dissolution requires that the corporation have no remaining assets or liabilities. If that is the case, I assume the first step would be to distribute any remaining funds and wind up the balance sheet to nil.
My question is regarding sequencing: should we first complete the wind-up and file the final T2 return in order to obtain the CRA clearance certificate, and then proceed with the dissolution filing? Or should the legal dissolution be filed first, with the final T2 prepared up to that date, as you previously indicated?
On a separate note, the partners’ contributions represent equity only; there are no shareholder loan balances. In summary, the three partners invested a total of $350,000. The company incurred continuous losses over several years and ultimately sold the business assets for $100,000, resulting in an overall economic loss of $250,000.
Given these facts, would the partners not be eligible to claim an ABIL for their respective share of the loss? I understand that retained earnings or accumulated losses alone are not determinative, but in this situation the shares have effectively lost value due to the disposition and wind-up.
I would appreciate your guidance on both the proper dissolution sequence and the ABIL eligibility in this scenario.
I asked chatgpt about this item, and it came back quite confused.
chatgpt: ”In a Canadian corporation, a balance sheet item like: “Partners’ Contribution – $350,000” is unusual terminology — because corporations don’t legally have partners (partnerships do).”
Depending on how it pans out fixing this up and correcting the documentation and recording thereof, there might well be S80(13) income with regards to this item, and complications generally with S80.
I would guess that perhaps several things need to be looked at and fixed (perhaps with the assistance of the corporation’s lawyer) before going to the lawyer for dissolution purposes or considering a final T2?
From a paperwork standpoint, yes. Get your directors/shareholders resolutions in order just prior to filing for dissolution. From a practicality standpoint, we wind-up in the final T2 period. Don’t get confused here ..
Again, wind-up in the period of the final return. File your dissolution with the province first, obtain a full certificate after.
You may be confused here.. When you wind-up the assets & liabilities, where do they go? To the shareholder loan accounts. At the end of the period (at dissolution), are they positive or negative (Dr. or Cr.)?
A credit would indicate a liability, meaning they’re out-the-money on their investment, thereby giving rise to a potential claim for ABIL Ss. 39(1)(c)
A debit would indicate an asset, meaning they’re in-the money and have to clear the balance via a deemed dividend on dissolution Ss. 84(3). This is a forced mechanism in the act.
Any remaining return balance accounts (such as non-capital or capital losses) are sunk forever .. this is what I was implying initially.
Question: ”in Canada, is a shareholder loan account an “equity” account or a “loan” account"“
Chatgpt:
“ Accounting Classification
A shareholder loan is recorded as either:
Liability (most common) → when the shareholder lends money to the corporation
Asset (receivable) → when the corporation lends money to the shareholder
It is not equity unless it is formally converted into shares. If the Shareholder Lends Money to the Corporation
Recorded as: Liability
Example:
You deposit $20,000 into your corporation.
The company records:
Cash ↑
Shareholder Loan (liability) ↑
It appears on the balance sheet under liabilities, usually called:
“Due to Shareholder”
“Shareholder Loan Payable””
Corporations and partnerships are two different types of entities. Corporations have shareholders, retained earnings, and must file T2 returns. Partnerships have no shareholders, no retained earnings, and must file T5013 returns (no T2). Corporations can issue dividends to shareholders, but it is not mandatory. Partnerships must allocate all income/losses to the partners at the end of each fiscal year, and can’t issue dividends (because there are no shares issued). Winding up a partnership is a different process than dissolving a corporation.
Which one is your client structured as?
Shareholder loans are typically liability accounts (but could hold a debit balance, making them technically an asset). Upon dissolution, you must recognize that the SHL balance affects the shareholder similar to their equity holdings - may cause a deemed dividend or capital loss, etc.
Due to/from shareholder on either side of the balance sheet under a normal going concern environment, but more of an equity like characteristic on dissolution. Took the words out my mouth!
Shareholders loans are not equity. Don’t trust ChatGPT of course, since that just regurgitates what’s written on the Internet, and a lot of what is written on the Internet is wrong. Instead ask an accountant. They’ll tell you that shareholders loans are liabilities, not equity.
A debit balance in the shareholder account would not result in a deemed dividend. It would result in a 15(1) shareholder benefit unless you declared an actual dividend to clear it.
@iain On this occasion, chatgpt not far off the mark
@deep: Happy to see that you edited out your post about Loans being Equity
Dissolution cannot occur until the described errors in the BS and documentation have been fixed, so could easily be S80 instead of S84, and/or for that matter probably other sections as well)
In any event, the file details are completely unknown, so I would not opine as to what this may or may not end up as, so I have no opinion as to what should be done.
Accounting Classification
If the Shareholder Lends Money to the Corporation
On this occasion, chatgpt not far off the mark 
