Entrepreneurship & Small Business

Important Question relating to Corporate Tax

  • Last Updated:
  • Dec 17th, 2019 11:23 am
[OP]
Newbie
Dec 12, 2019
2 posts
Toronto

Important Question relating to Corporate Tax

Hi Everyone,
I am new to this forum, but I do have some questions about corporate tax, I am providing a detailed story and listing my three questions in the bottom. For anyone that's willing to help, I appreciate your time! I will be using the name "XYZ" as my former friend in the story, and not disclose any private information. Note that this is an Ontario corporation.


My friend XYZ (former friend) formed a Property Management Company (Ontario Business Corporation) on July 16th, 2018, with his name "XYZ" on the registration being the president and sole director, recorded in ServiceOntario.

I joined the company as a president and a director on Aug. 20th, 2018, "XYZ" transferred me the president position and he was also a director. Two directors at this time.

On Feb. 20th, 2019, I successfully removed my name from the corporation as the president and as one of the directors, my name is not showing anywhere in the corporation record from this day and onward. So now XYZ is again the president and sole director, he is the only name showing in the corporation record.

Basically I joined the company for a limited amount of time from Aug. 20th, 2018 to Feb. 20th, 2019 as the president and one of the directors, during this time frame, my former friend XYZ was also one of the directors.
During which, from the date that I joined the company (Aug. 20th, 2018), till the day I quit the company (Feb. 20th, 2019), we have had absolutely no business activities, no business transactions, no income and expense at all, the company was just there for nothing and we almost forgot the existence of this company. XYZ also had no business activities before I joined the company, except one time his uncle transferred him $2000 to his CIBC business account (as a gift), but this was before I joined.

I lost connection with XYZ a couple of weeks after Feb. 20th, 2019 because of an argument between us (nothing to do this company or business or shares). He blocked my social accounts, changed phone number and email, and moved to a new address, and refused to speak to anyone that might have a connection with me. I tried my best to reach him but there is no way I could reach him.

Right now, The company is still marked as "active" status, we did not register for HST/GST account, we also did not file taxes for the year 2018 or 2019. I do not remember if the company was using calendar year-end or fiscal year-end.


So my questions are:

1. There is no way for me now to go and file tax for the year 2018 (or any fiscal period), as I have already quit the company in Feb 2019, and that I have lost connection with XYZ completely. I understand that fact that we should file taxes even if there were zero activities, however in my case, I cannot file the tax as I have no control anymore, and I am almost 99% sure that he did not file tax. Would the tax responsibility be solely on the current director XYZ now (after I quit)? Or am I still responsible for tax filing for 2018? (since I was with the company for a limited time in 2018). And if yes, how should I go ahead and get myself out of the trouble?

2. We have never signed any kind of documents about how to split shares or the control of the company, does mean I have absolutely no connection with this company anymore as long as I have removed my name from the corporation? (As director or president or officer).

3. Would the $2000 gift from his uncle (transferred to his business account before I joined) be considered as an income/transaction/business activity? If yes, does that have anything to do with me since it was an activity before I joined?

4. If I just leave the situation like as it is, and considering XYZ will never file tax. What would be the worst consequence for me? Will there be a criminal charge? Would CRA or the government contact me directly (without going through him) if there is an issue?


Please also post any other comments or suggestions.

Thank you so much for your help.
7 replies
Sr. Member
Nov 12, 2014
917 posts
589 upvotes
Kingston, ON
I think these are more legal questions than tax questions.
Deal Fanatic
Sep 23, 2007
5061 posts
1155 upvotes
cxuliam19 wrote: So my questions are:

1. There is no way for me now to go and file tax for the year 2018 (or any fiscal period), as I have already quit the company in Feb 2019, and that I have lost connection with XYZ completely. I understand that fact that we should file taxes even if there were zero activities, however in my case, I cannot file the tax as I have no control anymore, and I am almost 99% sure that he did not file tax. Would the tax responsibility be solely on the current director XYZ now (after I quit)? Or am I still responsible for tax filing for 2018? (since I was with the company for a limited time in 2018). And if yes, how should I go ahead and get myself out of the trouble?

2. We have never signed any kind of documents about how to split shares or the control of the company, does mean I have absolutely no connection with this company anymore as long as I have removed my name from the corporation? (As director or president or officer).

3. Would the $2000 gift from his uncle (transferred to his business account before I joined) be considered as an income/transaction/business activity? If yes, does that have anything to do with me since it was an activity before I joined?

4. If I just leave the situation like as it is, and considering XYZ will never file tax. What would be the worst consequence for me? Will there be a criminal charge? Would CRA or the government contact me directly (without going through him) if there is an issue?


Please also post any other comments or suggestions.

Thank you so much for your help.
You are probably overthinking the issue. The important thing is to ensure that you have properly resigned from the corporation as director. you can check this for free online. Enter the corporation name and you can see a list of directors.

The other big piece of info I got from you is that the corporation never had any transactions aside from the $2000 from uncle right? This can easily be called owner's contribution and not income. You only have a risk if 1) You earned and file positive net income on T2 such that you have incurred corporate income tax. 2) You collected HST/GST from customers and failed to remit. 3) You had active payroll and failed to remit source deductions 4) You paid a non-resident and did not remit withholding taxes. From what you wrote, none of the above happened and if the guy's first reaction is to block you from social media and try to not communicate, doesn't sound like a guy that will ever get a business rolling.

CRA being CRA, will generally chase who is easiest to chase. This would usually be the current director(s), not the former. If you are not a director and they don't have your name on file, they won't chase you. Simple as that. CRA is quite "slow". Suppose your former friend does launch a business, as long as you properly resigned and not on company records, CRA is unlikely to pursue you. It will take years for CRA to go through audits and reviews anyways before finally deciding you are guilty of anything.

Now...based on what you wrote, I also highly doubt either of you obtained a lawyer to update the minute book when you joined the company. Usually when new shareholders and directors are added, the minute book should be updated. So in addition to above, I don't think you were ever formally "on record"? How were you added as a director?

I think your only action step is to just confirm if you are still a director on the industry Canada public database for corporations. You can also call the CRA to be safe. it sounds like most likely CRA never even got your name if you never did anything. CRA typically get your contact information when you sign up for a business number. Did you ever register for a BN?

Good example of why you shouldn't partner with someone. If I had to do my business again, it must be 100% controlled by me. The more hands in the picture, the more paralysis from indecision and disagreements. Own 100% and hire people if you are missing a skill.
[OP]
Newbie
Dec 12, 2019
2 posts
Toronto
Thank you very much for your response,

I did check if my name is still in the government public record, however this is a Ontario Business Corp. so I wasn’t able to find it under federal corporation on the corporation Canada website, but I did do a search switch the Ontario government, and they have confirmed with me that my name was removed as of Feb. 20th, 2019.

Also, we have never hired a lawyer, neither had a minute book, or any other kinds of record or written agreement about my hiring or positions in the company, we also did not have any written agreement about shares (besides joking with each other that we own 50/50 of the company).

The $2000 CAD was the only money we got, nothing else, and I could confirm that none of those four circumstances you listed have happened (at least during my time in the company).

And I don’t know if I’m considered as properly resigned at this point, the Ontario public record is not showing my name as “President” or “Director” or anything else for sure. Besides that, do I need to write a letter of resignation, sign it and ask him to counter sign it in order to prove that I have properly resigned in the corporate law point of view? Because the corporate law states that a resignation is valid whenever the proper letter is delivered, but how do I prove that he has received a letter?

I was only added as a director by updating the Ontario public record, and then was resigned only by updating the record as well.

I don’t think we have ever updated CRA, and don’t have anything with them.

Also, my accountant told me that I need to obtain a transfer of stocks agreement, to transfer all my shares to the company and get my former friend to sign it, in order to properly prove that I have 0 shares with the company.
However I’ve never properly obtained any shares actually, how would I know how much shares to transfer back to him? Is this step necessary in my case?
He registered the company first, with him being the only one under the company. And then added me a month later, as President and Director, and then I quit after 6 months, no public record showing my name anymore. Do I really have any shares of the company in this case?

Thanks for your response,
I really appreciate your help.
Deal Fanatic
Sep 23, 2007
5061 posts
1155 upvotes
I would not even bother paying a professional to formally document your discharge from the company. If you never formalized the share transfer, and don't even have a minute book, then there is no record that you ever owned shares. The accountant probably just wants to earn a little bit of $$$ to give you more peace of mind. In my opinion this is unnecessary because it sounds like you already have enough evidence to show you are in the clear. If you never registered with CRA for a BN, you are golden. They literally have no way to reach you. And it sounds like you partnered with someone who will never get his s*** together to do something with the business. So most likely the CRA will never have a reason to chase.

Being a president/director or any other title does not automatically make you a shareholder and vice versa. Ownership and a job title are two separate things. The important thing is that no business transactions ever occurred during your term as director. This should be quite easy to demonstrate. Should the CRA ever chase the company (and with no transactions, they have no reason to), they will chase the current director(s) first.
[OP]
Newbie
Dec 12, 2019
2 posts
Toronto
Thank you very much!
I really appreciate your response!

I just want to mention one more thing. During the time that we was in this company, my former friend was operating an Airbnb (with his house) and was working part-time at the same time, and I was helping him with the airbnb as well, so he did pay me some cash, but this Airbnb was never operated under the company’s name, it was just under his own name and account, we never wrote any checks or received any income with the company’s name. So basically, we had this company in active status, but we were operating an airbnb on the side, has nothing to do with this company, we made around $5000-6000 profit only.
He also was working under a company, but that shouldn’t be related to the company at all, unless the Director’s personal income is also part of the company’s income (for corporations).

1. Would the airbnb or his work salary be related to the company at all from the government point of view? The airbnb was totally under his name except he added me as a co-host on the airbnb app to let me help him talk to guests, that’s the only record that would show how I was somewhat related to his airbnb account.

2. He gave me some cash time to time as appreciation for me helping him, like couple hundred dollars per months. But this was never recorded and through checks, maybe a couple times was through email transfers.

3. What if he is stupid enough to admit to CRA (let’s say CRA gets suspicious and chase him for something in the future) that he had an airbnb business going on during the time that I was in the company, and that he thinks the airbnb is operated under the company? The reason I’m asking is that this person does not know his own shit at all, I basically operated his airbnb for him, he did cleaning but all issues relating to payments were handled by me. And to confirm I’m 100% sure that the airbnb payments were made to his own personal account, because later someday the bank actually closed his business account because there was no transaction for a long time.

4. He never recorded any shares, does that mean he technically doesn’t legally own any shares of the company as well? And no one does own any shares? How does that work? Just curious.

Sorry for so many questions, just want to clarify my concerns.

Thanks
Deal Fanatic
Sep 23, 2007
5061 posts
1155 upvotes
Where did the 5000-6000 profit go? His own bank account right? If it's not to the corporation, there is nothing linking the Air b&b to it. If the money has been going to his personal bank account, then I am 100% sure CRA will chase him, not you.

Being a co-host and receiving some compensation can be viewed as an employee relationship. You technically could be liable for failing to report the income but based on what you described, the amount is rather small. It's like a slap on the wrist at most EVEN if CRA chase after you. Even his 5000-6000 is a pretty small number. I wouldn't worry based on what you described. The cash portions are likely untraceable. That's EVEN IF they somehow discover you worked with him. And I doubt your former friend kept any proper records. Though if he admits to owning an Air B&B to CRA, then yeah, he might report having paid you a couple hundred dollars. For a couple hundred a month, I don't think CRA is going to go gangbuster on you. They got bigger fish to catch.

For question 4, read this. https://www.ic.gc.ca/eic/site/cd-dgc.ns ... 06646.html. So from what you described, he would have been the first director. So he likely did no go through any formal motions to issue the initial shares. I wouldn't worry about this. If you buy stocks of TD bank for example, and let's say you own 5%. If the CRA then says TD violated some tax laws and owe 1 million, this doesn't mean you as a shareholder is personally liable for 5% of 1 million. Again, being a shareholder and a director are 2 different things. Director comes with certain liabilities, and generally only under extreme circumstances. Being a shareholder in general doesn't, unless defined otherwise by a shareholder agreement (which I am sure you don't have).

I'll emphasize again that your concerns are vastly overblown. The amounts are described are like pocket change in the world of corporate tax. The likelihood of CRA figuring out is slim. Even then, the chance of them bothering for such a small amount is even slimmer. THEN, the chance of CRA chasing you instead of him is astronomically slim. If an extra couple hundred bucks of unreported income bother you, then you are probably in a very low tax bracket anyways and the potential penalties are going to be negligible.
Member
Jan 18, 2017
251 posts
170 upvotes
You're over-complicating this hugely.

1. In situations like this, CRA only gives a crap about payroll withholdings and GST. As long as you aren't screwing around with large amounts of payroll and GST remittances (in other words, spending that money on fun stuff instead of remitting it to CRA) CRA won't care.

2. At most you have $7,000 in corporate income. You know what the back-taxes exposure on that would be? About $700. CRA doesn't care about your $700 - They have more important things to worry about.

Bottom line: You've resigned as a director. Your obligation/give-a-crap factor are ended. If it helps you sleep better at night, make sure you have formal, legal, paperwork that shows you resigning as a director. Then go on with your life.
cxuliam19 wrote: Hi Everyone,
I am new to this forum, but I do have some questions about corporate tax, I am providing a detailed story and listing my three questions in the bottom. For anyone that's willing to help, I appreciate your time! I will be using the name "XYZ" as my former friend in the story, and not disclose any private information. Note that this is an Ontario corporation.


My friend XYZ (former friend) formed a Property Management Company (Ontario Business Corporation) on July 16th, 2018, with his name "XYZ" on the registration being the president and sole director, recorded in ServiceOntario.

I joined the company as a president and a director on Aug. 20th, 2018, "XYZ" transferred me the president position and he was also a director. Two directors at this time.

On Feb. 20th, 2019, I successfully removed my name from the corporation as the president and as one of the directors, my name is not showing anywhere in the corporation record from this day and onward. So now XYZ is again the president and sole director, he is the only name showing in the corporation record.

Basically I joined the company for a limited amount of time from Aug. 20th, 2018 to Feb. 20th, 2019 as the president and one of the directors, during this time frame, my former friend XYZ was also one of the directors.
During which, from the date that I joined the company (Aug. 20th, 2018), till the day I quit the company (Feb. 20th, 2019), we have had absolutely no business activities, no business transactions, no income and expense at all, the company was just there for nothing and we almost forgot the existence of this company. XYZ also had no business activities before I joined the company, except one time his uncle transferred him $2000 to his CIBC business account (as a gift), but this was before I joined.

I lost connection with XYZ a couple of weeks after Feb. 20th, 2019 because of an argument between us (nothing to do this company or business or shares). He blocked my social accounts, changed phone number and email, and moved to a new address, and refused to speak to anyone that might have a connection with me. I tried my best to reach him but there is no way I could reach him.

Right now, The company is still marked as "active" status, we did not register for HST/GST account, we also did not file taxes for the year 2018 or 2019. I do not remember if the company was using calendar year-end or fiscal year-end.


So my questions are:

1. There is no way for me now to go and file tax for the year 2018 (or any fiscal period), as I have already quit the company in Feb 2019, and that I have lost connection with XYZ completely. I understand that fact that we should file taxes even if there were zero activities, however in my case, I cannot file the tax as I have no control anymore, and I am almost 99% sure that he did not file tax. Would the tax responsibility be solely on the current director XYZ now (after I quit)? Or am I still responsible for tax filing for 2018? (since I was with the company for a limited time in 2018). And if yes, how should I go ahead and get myself out of the trouble?

2. We have never signed any kind of documents about how to split shares or the control of the company, does mean I have absolutely no connection with this company anymore as long as I have removed my name from the corporation? (As director or president or officer).

3. Would the $2000 gift from his uncle (transferred to his business account before I joined) be considered as an income/transaction/business activity? If yes, does that have anything to do with me since it was an activity before I joined?

4. If I just leave the situation like as it is, and considering XYZ will never file tax. What would be the worst consequence for me? Will there be a criminal charge? Would CRA or the government contact me directly (without going through him) if there is an issue?


Please also post any other comments or suggestions.

Thank you so much for your help.
______
Canadian & US tax guy (CPA)

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