16 October 2009 Internal T.I. 2009-0328701I7 - Tax Recovery When Corporate Charter Cancelled

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the bank account of the sole proprietor (who was the sole shareholder) can be garnished to collect the debt of the corporation.

Position: No.

Reasons: Shareholders are generally not liable for the debts of the corporation.

									October 16, 2009

   East Central Ontario						HEAD OFFICE
   Tax Services Office/Bellevile				Lindsay Frank
(613) 948-2227
									2009-032870
Attention: Jason Landrus, Team Leader
          Taxpayer Services and Debt Management Section

Cancellation of a Corporate Charter

This is in reply to an email from Joanne Dafoe, who raises the following issues:

1. which section of the Income Tax Act ("the Act") provides that the continuation of an entity, whose corporate charter has been cancelled, renders it as a sole proprietorship; and

2. whether the sole proprietor's bank account can be garnished under section 224 of the Act to satisfy the liability of the defunct corporate entity.

The Act does not contain any provision that deals specifically with the involuntary dissolution of a corporation. Rather, this is a function of the underlying corporate law. In this instance, subsection 240(1) of the Business Corporations Act of Ontario provides that once a corporation's certificate of incorporation is cancelled, that corporation is dissolved.

Interpretation Bulletin IT-444R comments on the effect of dissolution. In that regard, a corporation may receive income from a business or property after it has been dissolved, and any income earned will be taxed as income of a proprietorship, partnership, joint venture, or trust, depending on the facts of the particular situation. Likewise, any liability incurred will usually be payable by the proprietorship, partnership, joint venture, or trust, as the case may be.

Where a single individual directs and controls the business, the business effectively becomes a sole proprietorship, and liability attaches against the proprietor. Where more than one individual directs and controls the business, it is a question of fact as to whether the business is operating as a partnership or as a joint venture. For instance, if it has been determined that the former shareholders directing the business have shared in the profits or losses not unlike members of a partnership, and have held themselves out to be jointly and severally liable for the debts of the business, then, in all likelihood, a partnership exists. On the other hand, where there is no evidence that a partnership exists, the profits and losses of the business should be taxed as a joint venture, with each co-venturer sharing in the profits and losses of the business proportionate to his or her interest in the property used for carrying on the business.

The indicia of a partnership are easier to ascertain after the year-end sharing of the profits and losses of the business with the result that liability for tax is somewhat easier to ascertain. Conversely, where the failure to remit source deductions were to arise before the year-end sharing of profits and losses, the apportionment of liability would be more difficult. Given the nuances of each fact situation the prudent approach would be to seek a legal opinion based on the individual facts of each case.

With respect to debts incurred by a corporation before dissolution, it should be noted that a corporation is a person that is separate from its shareholders. These shareholders are not generally liable for the debts of the corporation. Any debts that the entity incurred as a corporation are not transferred to the sole proprietorship, where an individual directs and controls it after it is no longer a corporation. Accordingly, a Requirement to Pay under section 224 of the Act cannot be issued to seize funds in the sole proprietor's bank account to satisfy the debt that the entity incurred as a corporation.

Should you need clarification or additional information, please do not hesitate to contact Lindsay Frank at the number provided above.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Business and Partnerships Division
Income Tax Rulings Directorate

c.c. Joanne Dafoe

Taxpayer Services and Debt Management Section
East Central Ontario Tax Services Office/Belleville