Checklist: How to Close Sole Proprietorship in Ontario

If you are closing a sole proprietorship in Ontario, there are several important steps you need to follow to ensure a smooth transition and compliance with legal obligations. In this checklist, we’ll explore the essential steps involved in closing your sole proprietorship in Ontario, providing clarity and direction to navigate this significant business decision effectively.

In this blog, I will share the best way to close your sole proprietorship business while avoiding potential legal repercussions and safeguard your personal assets from creditors. The topics to be discusses include:

  1. Setting a date of closure
  2. Notifying Customers/Clients
  3. Informing Supplies/Vendors
  4. Notifying Employees
  5. Handing Over Remaining Inventory and Assets
  6. Cancelling Permits and Registrations
  7. Filing for final taxes
  8. Storing record of all activities

Step 1: Set a Date of Closure

Before closing your business, set your date of closure. This is the date where all business activities will cease to exist. Since all sole proprietorships have a year-end date of Dec 31, your end date can be anytime on or before December 31. It is probably best to set the date as December 31 is you are unsure of when all business activities will cease during the year. Remember though, once you set your date and file your taxes, any activities that happen after your date of closure may require an amendment to your taxes.

  • Set a date of closure on or prior to December 31
  • Prepare to cease all business activities on or prior to December 31
  • Choose 2 or more date of closures prior to Dec 31 (a soft date for customers and other stakeholders for example, and a hard one for the business overall)

Step 2: Notifying Customers/Clients

Prior to closing your sole proprietorship, you should notify your clients/customers. This can be done through your medium of choice such as email, social posts, telephone, etc. The medium you choose to use depends on the connection you had with your clients over the years. Notifying clients/customers prior to closure also involves offering assistance and resolving any outstanding client issues.

  • Choose your communication medium to inform clients/customers of closure
  • Draft a letter to notify customers of your business closure (include gratitude, access to support and important dates)
  • Send notification of closure to clients/customer
  • Offer assistance to resolve any outstanding client issues
  • Provide guidance on how they can access support, retrieve any outstanding products or services, or seek alternative providers if necessary.
  • Update refund and exchange policies
  • Write off any outstanding invoices that will not be paid

Step 3: Inform Suppliers and Vendors

In addition to communication your closure to customers, you should also communicate closures to supplies and vendors. This will allow you to close off your account with them, pay off any outstanding balances with them and resolve any issues. It also gives them a chance to prepare for any last-minute orders.

  • Send written notification letters or emails to each supplier and vendor informing them of your intention to close your sole proprietorship
  • Settle any outstanding bills with vendors promptly
  • Make arrangements to return the equipment according to the terms of your agreements.
  • Cancel subscriptions and accounts with vendors
  • Coordinate the return of any unsold inventory or merchandise to suppliers or vendors.
  • Request confirmation from each supplier and vendor acknowledging receipt of your closure notification and confirming any remaining obligations or actions required on their part.

Step 4: Notify Employees

Care must be taken when notifying employees of business closure as this can be a sensitive topic. As a business owner, ensuring transparency, fairness, and compliance with employment laws is essential to uphold the rights and well-being of your employees during this transition. It is important to provide as much information as possible when notifying employees of business closure as well as ample time for them to prepare for the transition ahead. Here are items to check off when notifying employees of business closures in Ontario.

  • Review the employment contracts of all employees to understand any specific clauses regarding termination notice or severance pay.
  • Determine the notice period required by law or as specified in employment contracts
  • Draft termination letters for each employee, clearly stating the reason for termination, the effective date, and any entitlements to notice period, severance pay, or benefits continuation.
  • Schedule individual meetings with each employee to deliver the termination letter and discuss the closure of the business
  • Explain to employees their entitlements to severance pay, if applicable
  • Explain the process for issuing Records of Employment (ROEs) to employees and issue ROEs promptly
  • Offer to provide reference letters or serve as a reference for employees as they seek new employment opportunities
  • Address any concerns or questions raised by employees regarding the closure of the business
  • Document details of the meetings with employees, including dates, discussions, and any agreements reached regarding notice periods, severance pay, or other matters
  • Ensure that the termination process complies with all relevant employment laws and regulations in Ontario

Step 5: Handover Remaining Inventory and Assets

As you prepare to close your sole proprietorship, you will find yourself with unsold, unused or even damaged inventory and assets. It is important to have careful consideration and strategic planning to manage these items in order to maximize value and minimize losses. Here’s how to navigate this aspect of the closure process.

  • Take a final inventory of items that will not get sold
  • Sell off unwanted inventory is to host clearance sales, sell them off at marketplaces, or partner with liquidation companies to offloads gross at a discount
  • Communicate the reason you are selling these items to buyers
  • Consider donating unsold items to charity
  • Explore disposable options for damages or expired goods.
  • Consider hosting auctions, partnering with asset liquidation firms, or listing items for sale through online marketplaces to recoup value before closure.
  • If your business owned or leased commercial spaces, assess the options for selling or transferring these assets.
  • Consult with real estate agents or legal professionals to navigate the process of listing property for sale, terminating leases, or transferring ownership to new tenants or buyers.
  • Explore options to license or sell your intellectual property to third parties, either as standalone assets or as part of a broader business acquisition.
  • Consult with intellectual property attorneys or brokers to negotiate favorable terms and ensure legal compliance throughout the transfer process.
  • Take steps to safeguard confidential information and trade secrets as part of the closure process.
  • Implement data encryption, password protection, or non-disclosure agreements to prevent unauthorized access or use of sensitive business information by employees or external parties.

Step 6: Cancel Permits and Registrations

Cancelling your permits and registrations for your business should occur when all (except tax filing) business activities have ceased. You don’t want a situation where you cancel your permits and are still conducting business. Note that this does not yet include anything related to taxes just yet.

  • Take stock of all business registrations and permits obtained at the federal, provincial and municipal levels.
  • Complete and submit cancellation forms as required by the respective issuing authorities
  • After submitting cancellation requests, follow up with the relevant authorities to obtain confirmation of closure.

Step 7: Filing for final taxes

The last thing to do after you close your sole proprietorship in Canada is to file your taxes. This will include your T1 personal tax, sales taxes, and your payroll taxes.

Filing T1 Personal Tax for Sole Proprietorship

  • Report all business income earned up to the date of closure on the T1 return
  • Deduct allowable business expenses incurred up to the closure date to calculate your net business income.
  • Ensure you properly report any capital gains or losses resulting from the sale or disposal of business assets.
  • Consider consulting with a tax professional or accountant for assistance with complex tax issues or deductions related to closing your business.
  • Indicate that your business has ceased operations on the tax form
  • Pay any outstanding taxes owed by the due date indicated on your final T1 return
  • Once you have completed your final T1 return and paid any outstanding taxes, file the return with the Canada Revenue Agency (CRA) by the specified deadline.

Filing Sales Taxes

In Canada, when closing a sole proprietorship, it’s essential to follow the appropriate procedures for filing sales taxes with the Canada Revenue Agency (CRA). Here’s a step-by-step guide on how to file sales taxes for a sole proprietorship when closing a business in Canada:

  • Determine the final reporting period for which you need to file sales taxes
  • Calculate the total sales tax obligations for the final reporting period
  • Complete and file the Goods and Services Tax/Harmonized Sales Tax (GST/HST) return form with the CRA
  • Remit the total amount of sales tax collected to the CRA
  • If your sole proprietorship was registered for GST/HST purposes, you may need to close your GST/HST account with the CRA
  • Complete Form RC145, “Request to Close Business Number Accounts”, and submit it to the CRA

Filing Payroll Taxes
In Canada, if you’re closing your business and need to file sales taxes for payroll, you’ll need to follow specific steps to ensure compliance with the Canada Revenue Agency (CRA). Here’s a general guideline on how to file sales taxes for payroll when closing a business in Canada:

  • Decide on the final period that you will process payroll for
  • Calculate the final amounts owed to each employee based on their accrued wages, vacation pay, overtime, and any other entitlements
  • Process payroll for the final period and issue paychecks or direct deposits to employees on the scheduled payday
  • Include detailed pay stubs outlining all components of their final compensation, deductions, and taxes withheld
  • Ensure that all outstanding payroll deductions are remitted to the CRA by the applicable deadlines.
  • Prepare and file T4 slips for each employee to report their income, deductions, and taxes withheld for the calendar year up to the date of closure
  • Provide T4 slips to employees and submit copies to the CRA by the specified deadline, usually by the end of February following the tax year
  • Report the final payroll information to the CRA using the appropriate forms or electronic filing methods
  • Once all payroll obligations have been fulfilled, including remittance of deductions and filing of T4 slips, you can close your payroll account with the CRA
  • Contact the CRA to inform them of the closure of your business and request the necessary steps to close your payroll account.

Step 8: Storing, Transferring or Disposing Business Records

Proper management and storage of business records is essential to ensure compliance with legal requirements and facilitate a smooth transition out of operations.

In Canada, business records must be kept for up to 6 years in case of an audit. Businesses in Canada are required to maintain accurate and up-to-date records for tax purposes, financial reporting, and regulatory compliance. Failure to comply with record-keeping requirements can result in penalties or legal consequences. Here are a few items to ensure proper storing, transfer and disposing of business records.

  • Store paper records in a secure and climate-controlled environment to prevent damage from moisture, pests, or other environmental factors
  • Use filing cabinets, storage boxes, or off-site storage facilities to safeguard important documents
  • Transitioning to digital record-keeping can streamline the storage process and facilitate easier access to information
  • Invest in secure cloud-based storage solutions or digital document management systems to store electronic records securely. Ensure data encryption and access controls are in place to protect sensitive information
  • Organize business records into categories based on their type, relevance, and retention requirements
  • Categorize files based on financial records, tax documents, legal agreements, employee records, and corporate governance documents
  • Organize business records into categories based on their type, relevance, and retention requirements
  • Properly dispose of sensitive or confidential records using secure shredding methods to prevent unauthorized access or identity theft
  • Follow established protocols for document destruction and maintain records of the disposal process for audit purposes
  • Consult legal counsel to understand the requirements and best practices for record disposal in accordance with Canadian law.
  • Coordinate with legal advisors and the new owner to facilitate a smooth transition of records and information.
  • Provide employees with access to their own employment records and ensure compliance with privacy laws regarding the handling of personal information.
  • Establish procedures for returning company-owned devices and access credentials to prevent unauthorized access to business records.

Conclusion to How to Close Your Sole Proprietorship Business in Canada

As you can see, closing your business does not have to be a daunting task. By adhering to these guidelines, you can have a stress-free end to a chapter and look forward to a new one.

To recap, here are the 8 steps to close your Sole Proprietorship Business in Canada:

  1. Setting a date of closure – chose a date to end all business activities
  2. Notifying Customers/Clients – tell customers/clients of your business closure and resolve any outstanding issue with them
  3. Informing Supplies/Vendors – inform supplies/vendors of your closure and close all vendor/supplier accounts
  4. Notifying Employees – inform employees of the closure
  5. Handing Over Remaining Inventory and Assets – turn all remaining assets to cash or donate them if possible
  6. Cancelling Permits and Registrations – cancel all business permits when all business activities have ended
  7. Filing for final taxes – file your final taxes for business closure and close all tax accounts
  8. Storing record of all activities – store records for 6 years, and dispose of unwanted records

If you need help closing your sole proprietorship business or transitioning from a sole proprietor to a corporation, book a free consultation call with us.

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