Are Your Business’s Records & Minute Books Up to Date?
Do you have a corporation? Is your minute book up to date with annual resolutions each year? If it isn’t, there can be severe consequences, from higher taxes and penalties in the case of an audit to ramifications on the viability of selling your corporation in the future.
Under the Ontario Business Corporations Act or the Canada Business Corporations Act, a corporation is required to keep, in one book, a record containing 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 those under corporate legislation. These records include 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, which typically occurs when a corporation holds corporate vehicles. Under tax legislation, the corporation is required to keep its books and records in a legible and retrievable format that is ready for inspection at any time by a CRA auditor.
If you don’t have these records, you run the risk of being unprepared in the case of an audit. During an audit, the corporate minute book is typically one of the first items requested. 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 that 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 prospect of being unprepared in the case of an audit, there are many other important reasons for having 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 or you may need to show evidence of 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? In all likelihood, that won’t pass the CRA’s tracing scans, which has the ability to trace the age of the documentation using scientific tests. If you date documentation backwards, you’ve now falsified records provided to the Agency. If discovered, you will be hit with severe penalties and even criminal prosecution. Further, a purchaser may decide not to purchase your business once it is discovered that proper records weren’t kept as required by law. This may be indicate sloppy business management – maybe there are more skeletons to find?
If you your corporate minute books are not up to date, or if you’ve 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 that no resolutions were previously enacted. The documents further state your wishes 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, we can reconstruct one. Here, we will 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 with Annual Resolutions
Finally, whatever the state of your corporation’s records, note that annual resolutions are required to be prepared each year. Annual resolutions are resolutions that 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 the 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, and 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 resolutions are prepared each year? Typically, we will reach out to your accountant to obtain the corporation’s financial statements and balance sheets at approximately three months after your corporation’s fiscal year-end. We will then 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.
- If you are audited by the CRA, you run the risk of having to pay more taxes than you would have otherwise if you had kept proper records.
- You may be hit with additional penalties for failure to comply with the law.
- A prospective buyer of the shares of the corporation will want to review the minute book so it would require more time and effort to go back in time to update the minute book.
Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.