Before closing, it is necessary to determine the fate of each asset. Assets do not disappear when operations cease.

They can be sold, transferred to a shareholder, or retained. Each option can result in different taxes and duties.

Summary answer: before closing, inventory and appraise assets at their fair market value, document each sale or transfer, and analyze income tax, GST, and QST. A transfer to a shareholder is not tax-free and can create a gain, recapture of depreciation, or a taxable benefit.

Step 1: Prepare a complete inventory of assets

Extract the balance sheet and the fixed asset register, then confirm the assets held.

Classify them by category:

• cash and accounts receivable;

• merchandise and raw materials;

• furniture, computers, and equipment;

• vehicles;

• land or building;

• leasehold improvements;

• software, trademarks, and domain names;

• clientele, contracts, and goodwill;

• deposits and investments.

For each asset, add its cost, book value, tax class, estimated fair market value, intended buyer, and disposal date.

Note: An asset not on the balance sheet may still have value. An internally developed trade name or a customer list is not necessarily listed as an accounting asset.

Step 2: Determine the fair market value

Fair market value generally represents the price that informed, arm's length buyers and sellers would agree upon in a free market.

It is not necessarily equal to:

• the original cost;

• the book value;

• the unamortized tax balance;

• the price desired by the owner.

Keep evidence: comparable advertisements, offers received, independent appraisal, prices of comparable vehicles, or calculation related to transferred revenues.

A formal appraisal becomes prudent for a building, specialized equipment, or a transaction with a shareholder.

Step 3: Choose between a global sale and separate sales

Global sale to a buyer

A buyer may acquire the necessary assets to continue the business: inventory, equipment, contracts, clientele, and intellectual property. This solution often preserves more value than a rushed item-by-item sale.

For GST/HST purposes, when the buyer acquires all or almost all—generally at least 90%—of the assets necessary for the operation of the business or part of a business, the parties can sometimes make a joint election not to collect tax on certain goods. Form GST44 and the corresponding QST rules must be analyzed before the transaction.

Separate sale of assets

When the business cannot be transferred, assets can be sold separately. Invoices and contracts should specify the description of the asset, the price, applicable taxes, and the transfer date.

An auction may generate less than a targeted sale. Allow time before dissolution.

Step 4: Analyze the tax consequences per asset

The treatment depends on the nature of the asset.

Inventory

The proceeds from the sale of inventory generally enter into the calculation of business income. GST and QST are normally applicable when the goods are taxable.

Equipment and vehicles

The sale of a depreciable asset can result in a recapture of depreciation when the tax proceeds exceed the applicable balance of the class. A terminal loss may sometimes occur when the class no longer contains assets. A capital gain is also possible if the price exceeds the original cost.

Land, building, and investments

The sale can produce a capital gain or loss. For a depreciable building, a recapture of depreciation may be added. GST and QST rules vary depending on the nature and use of the building.

Intangible assets and goodwill

An amount attributed to clientele, a trademark, or goodwill must be documented. These assets may fall under tax class 14.1.

When several assets are sold together, the allocation of the price among the assets must be reasonable and consistent for the seller and the buyer.

Step 5: Document transfers to shareholders

A shareholder cannot simply take a vehicle or computer belonging to the company because it is closing.

If the company sells an asset to the shareholder below its fair market value, the difference may constitute a taxable benefit for the shareholder. The company may also be deemed to have disposed of the asset under tax rules that prevent artificially creating a loss.

Example

A company owns a vehicle with a book value of zero, but a fair market value of $18,000. The shareholder keeps it personally without paying any amount.

The transaction should not be recorded at zero. It is necessary to analyze the disposition by the company, the potential benefit to the shareholder, and the applicable GST/QST.

Prepare an invoice or agreement, obtain proof of value, and correctly record the transaction in the books.

Step 6: Deal with assets still held at the close of taxes

Closing GST and QST accounts while the business still owns assets can trigger deemed dispositions or change-of-use rules.

For inventory and certain non-capital assets, the business may be deemed to have sold them at their fair market value and to have collected taxes. For capital assets, the calculation may instead depend on their tax content and specific applicable rules.

Before canceling registrations, consult How to close GST, QST, and source deduction accounts?.

Therefore, do not wait for the final declaration to list the assets. Decide on their treatment before requesting the cancellation of registrations.

Checklist before disposing of assets

• Extract the balance sheet and the fixed asset register

• Physically confirm each asset

• Estimate and document the fair market value

• Identify assets that might interest a buyer

• Compare a global sale and separate sales

• Analyze income tax, recapture of depreciation, and taxes

• Document transfers to shareholders

• Reasonably allocate the price of a global sale

• Account for dispositions before final declarations

• Ensure no asset is overlooked before dissolution

Preserve value before liquidating assets

The sale of assets should not be improvised after the announcement of the closure. A client base, a trade name, or a set of equipment may be worth more to a competitor than in a separate liquidation.

Before selling assets one by one, check if a buyer could acquire a functional part of the business. TRNSFR can help you explore this possibility before asset liquidation.

Also consult How to close a business in Quebec: the concrete steps to follow.

Sources

• Canada Revenue Agency, Close your GST/HST account

• Canada Revenue Agency, Acquiring an existing business

• Canada Revenue Agency, Shareholder benefits

This article provides general information. Tax treatment must be confirmed according to the nature of each asset and the transaction structure.