A Canadian Liquidation Agreement is a legal contract that governs the orderly dissolution and winding up of a business entity, whether a partnership, corporation, or joint venture. The agreement establishes the process for converting business assets to cash, satisfying outstanding obligations to creditors in the order prescribed by law, and distributing remaining proceeds to the partners, shareholders, or members. In Canada, the legal framework for dissolution depends on the type of entity and whether it is registered or incorporated under federal or provincial law.

For partnerships, dissolution is governed by provincial partnership legislation. The Ontario Partnerships Act (R.S.O. 1990, c. P.5), the British Columbia Partnership Act (R.S.B.C. 1996, c. 348), the Alberta Partnership Act (R.S.A. 2000, c. P-3), and their equivalents in other provinces establish the rules for how partnerships are dissolved, how assets are applied to debts, and how the surplus is distributed among partners. Under these statutes, after dissolution, each partner's authority to bind the firm continues only to the extent necessary to wind up the partnership's affairs and complete transactions begun but unfinished at the time of dissolution.

For corporations incorporated under the Canada Business Corporations Act (R.S.C. 1985, c. C-44), voluntary dissolution is governed by sections 210 and 211 of the CBCA. A corporation with no issued shares or commenced business may be dissolved under section 210 by resolution of the directors. Otherwise, dissolution requires a special resolution of the shareholders under section 211. The corporation must give notice in each province where it carries on activities, collect and dispose of its property, discharge all obligations, file final tax returns with the Canada Revenue Agency (CRA), and distribute remaining property among shareholders according to their rights before filing articles of dissolution with Corporations Canada.

A Canadian Liquidation Agreement is needed when the partners, shareholders, or members of a business entity have decided to dissolve the entity and wind up its affairs. A general partnership with two or more partners dissolving by mutual agreement requires a liquidation agreement to document how the partnership property will be collected, valued, and applied — first to pay debts and liabilities, then to distribute the surplus among the partners according to their interests.

A corporation that has ceased active operations and wishes to formally dissolve under the CBCA or a provincial Business Corporations Act needs a liquidation agreement to coordinate the winding-up process among the shareholders. The corporation must discharge all tax obligations to the CRA, including filing final corporate income tax returns (T2), final GST/HST returns, and obtaining a tax clearance certificate under section 159 of the Income Tax Act before distributing assets to shareholders.

Joint ventures established for specific projects — such as a real estate development, a mining exploration, or a technology partnership — require liquidation agreements when the project concludes or the parties decide to terminate the venture. The agreement governs the disposition of project assets, allocation of final profits or losses, and release of mutual obligations.

A liquidation agreement is also essential when a partnership or corporation is being dissolved due to irreconcilable disputes among the partners or shareholders. In the absence of a written agreement, the parties may be forced to apply to the court for a winding-up order under the applicable provincial partnership act or under CBCA section 214, resulting in significantly higher costs and loss of control over the process. The agreement prevents disputes by establishing clear procedures for asset valuation, creditor payment priority, employee notification requirements, and the distribution of remaining assets.

A valid Canadian Liquidation Agreement must identify all parties by their full legal names and addresses, specify the type of entity being dissolved (partnership, corporation, or joint venture), and reference the original agreement under which the entity was established. The dissolution date must be clearly stated, along with the effective date of the liquidation agreement.

The appointment and authority of the liquidating party (or liquidator) must be defined. This person or entity manages the winding-up process, compiles the asset inventory, negotiates with creditors, and executes necessary documents. The agreement should specify whether the liquidator requires approval from the other parties for dispositions above a stated threshold.

The creditor payment priority section must follow the statutory hierarchy: secured creditors first, then priority unsecured claims (amounts owing to the CRA for income tax, GST/HST, payroll source deductions), then general unsecured creditors, and finally the partners or shareholders. Under the Income Tax Act, when partnership property is distributed to partners during winding up, the partnership is deemed to have disposed of the property at fair market value, potentially triggering capital gains or losses.

Asset valuation methodology should specify whether assets will be appraised by an independent valuator, sold at auction, sold through private sale, or distributed in kind. The distribution waterfall must define the order for final distributions: return of capital contributions, payment of accrued but unpaid amounts, and allocation of remaining surplus according to ownership percentages or as otherwise agreed. Non-competition and confidentiality clauses should be included to protect the parties' interests during and after the winding-up process. The governing law clause must specify the applicable Canadian province, and the agreement should address employee notification requirements under the applicable provincial employment standards legislation or the Canada Labour Code.