Corporate Dissolutions and Tax-Free Windups

Where a corporation ceases to exist and is dissolved, either voluntarily or by the action of the relevant corporate authorities, it may result in further income taxation to both the corporation itself and to its shareholders.

The legal procedures and requirements for corporate dissolutions are governed by corporate law of the relevant jurisdiction. For example, in Ontario the dissolution is governed by the provisions of Ontario Business Corporations Act.

However, generally a dissolution or any other discontinuance of corporate existence results in a liquidation of the corporation, whereby its liabilities must be discharged and all assets be distributed to its shareholders, whose shares in the corporation are deemed to be disposed for the value of the assets received from the corporation. These will generally constitute taxable events to the corporation and its shareholders, who may be subject to income tax on the income and capital gains realized on the disposition of properties.

However, in certain circumstances, a corporation may be wound up tax free into its parent corporation under section 88 of the Income Tax Act.

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