Are Your Business’s Records & Minute Books Up to Date?
Do you have a corporation? Is your minute book updated with annual resolutions each year? What’s the big deal if they’re not?
Under the Ontario Business Corporations Act, or the Canada Business Corporations Act, a corporation is required to keep, in one book, a record containing certain information such as the Articles of Incorporation, the Extra Provincial Registration, the corporate by-laws, and the organizational resolutions of the directors and shareholders. The latter resolutions indicate who occupies the positions of president, secretary, CEO and director of the corporation. The resolutions also set out the corporation’s fiscal year end, its corporate accountant, its corporate bank, its corporate lawyer and of course, most importantly, its shareholders. Together, these documents are known as the minute book of the corporation and a corporate minute book is required under law.
Under the Income Tax Act, a corporation is required to keep a different set of ‘books’ than under corporate legislation. These records are the bookkeeping and accounting books which, at a basic level, record the income and expenses of the corporation. Today, these records are typically recorded in a bookkeeping software or they can be manually recorded in handwritten books or electronic spreadsheets. There may be additional logs required depending on the nature of the assets held by the corporation; such is the case when a corporation holds corporate vehicles. Under tax legislation, the corporation is required to keep its books and records in legible and retrievable format for inspection at any time by a CRA auditor.
What’s the big deal if you don’t have these records? Well, let’s hope you don’t get audited. Upon audit, the corporate minute book is typically one of the first items requested to be viewed. Next are the financial books and records. If these aren’t in existence, or retrievable, you will most certainly be supplied with an audit proposal letter which demands you pay much more tax than you otherwise would. You may also even be hit with penalties for your failure to comply with the law.
Aside from the scare of the CRA, there are many are other important reasons why you need proper corporate books and records. If your corporation is interested in purchasing real estate, or someone is interesting in purchasing your business, you will need a corporate minute book to demonstrate the history of the corporation. Other times, you may be required by a third party to evidence your shareholdings in a particular corporation. Without a minute book with properly issued share certificates, you will not be able to demonstrate that you own the corporation, which is separate and distinct from being a director of the corporation.
Many clients ask, why is this important to obtain now? Can’t you simply create the minute book when requested by the CRA or the prospective purchaser? You could try. However the CRA has the ability to trace the age of the documentation using scientific tests. If you date documentation backwards to a date before today, you’ve now falsified records provided to the Agency, and you can be sure to be hit with severe forms of penalties and even criminal prosecution. Further, a purchaser may not be so interested in purchasing your business once he or she discovers that proper record keeping wasn’t done as required by law. This may be indicative of sloppy business management – maybe there are more skeletons to find.
Have a corporate minute book and haven’t done all that? No worries. We can help. If your corporation has never prepared annual resolutions, we can easily get your corporation in order. We can prepare ratifying and rectifying omnibus resolutions which are legal documents that state for whatever reason, no resolutions were previously enacted. The documents state that you now wish to ratify all past acts and rectify the lack of documentation by enacting these resolutions retroactively and updating your minute book.
If you have no minute book or share certificates at all, again, not to worry. We’ll simply reconstruct one. Here, we prepare a statutory declaration affirming that for whatever reason, no records exist or that all corporate documents have been lost or otherwise destroyed. We supplement the declaration with ratifying and rectifying annuals and obtain an official physical minute book.
Ongoing Corporate Record Maintenance
Finally, whatever the state of your corporation’s records are, note that annual resolutions are required to be prepared each year. Annual resolutions are resolutions which state that the directors and shareholders have reviewed and approved the financial statements of the corporation. The financial statements are prepared by the corporation’s accountant and are used to file the corporation’s annual T2 income tax return.
In addition to the standard approval resolutions, annual resolutions often include resolutions that extract funds from the corporation to the shareholders personally. These resolutions may declare capital dividends from the non-taxable portion of a corporation’s capital dividend account (CDA). They may declare eligible dividends extracted from a corporations General Rate Income Pool (GRIP). Or, they may declare non-eligible dividends drawn from the corporation’s Low Rate Income Pool (LRIP) which are your most common form of dividends for businesses subject to the Small Business Deduction (SBD). Resolutions can also declare share redemptions (taxed as deemed dividends), management bonuses other forms of year-end resolutions in order to extract retained earnings from the corporation in the most tax efficient manner.
How does our firm help ensure these are prepared each year? Typically, at around three months after your corporation’s fiscal year end we will reach out to your accountant to obtain the corporation’s financial statements and balance sheets. From these, we prepare the annual resolutions of the directors and shareholders and any other year end resolutions. In this way, we ensure that your corporation continues to remain in compliance with the law, and in good standing.
For more information on corporate records and minute books, contact a corporate lawyer within our firm.