What are the tax consequences of winding up my Ontario corporation?

When you wind up a corporation and distribute its remaining assets to shareholders, the distribution is treated as a deemed dividend to the extent it exceeds the paid-up capital of the shares. Paid-up capital is generally the amount originally paid into the company for the shares, not retained earnings. The deemed dividend is taxable in the hands of the shareholder just like any other dividend from a private corporation.

Any excess of proceeds over the adjusted cost base of the shares is a capital gain, and any amount below adjusted cost base is a capital loss. If the corporation still holds appreciated property at wind-up, the corporation itself may realize a capital gain on the deemed disposition of those assets before the distribution.

For a CCPC, a qualifying wind-up into a parent Canadian corporation can occur on a tax-deferred basis. Individual shareholders winding up an operating company generally cannot defer. If you have significant retained earnings or goodwill, a sale of shares (which may use the lifetime capital gains exemption) is often more tax-efficient than a wind-up distribution. Plan any dissolution with an accountant and lawyer well before taking steps with the CRA or provincial registry.