63 What tax issues accompany the acquisition of control of a corporation?

In terms of definition, acquisition of control can be the change of control to a single person or a group of individuals. IT-302R3 defines control of a corporation as “ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors.”

Per the Income Tax Act section 249(4), the taxation year end is implemented or deemed to be immediately prior to the change of the acquisition of control.   So, a tax return needs to be filed at this deemed year-end when there is a change in control.

The second issue comes from the Income Tax Act sections 111(5)(a) and 251.2(2). Previous non-capital losses from the corporation cannot be carried forward once the corporation ownership has been changed. This rule has two exceptions,

• There is an intention of making a profit as the business continues to operate.

» The losses carried forward must be used against income from the same business or another business with the same goods and services being sold, under the corporation.

• The loss can only be used to bring the profit of the corporation to $NIL for that particular tax year.

In addition to the change in control, per IT-302R3, “losses incurred after an acquisition of control cannot be carried back and deducted in a taxation year ending before control was acquired.”

Per section 111(4)(a) and (b), net capital losses cannot be used by the acquirer regardless of the exceptions above.

For example, if majority shares of a corporation were taken over on January 20^th the deemed year end would be the same date. Prior to January 20th, the corporation had net capital losses of $35,000 and non-capital losses of $15,000. As the acquirer has the intention of carrying on a similar business to make a profit, they are allowed to carry forward the $15,000 non-capital losses. The corporation has taxable income of $10,000 in the following year and was therefore able to use $10,000 non-capital losses to bring their taxable income to NIL.

Interactive content (Author: Loveleen Gill, January 2020)

Interactive content (Author: Puneet Tugnait, January 2020)

References and Resources:

• Income Tax Act – 111(4)(a) & (b), 111(5)(a), 249(4), 251.2(2)
• Government form – “IT-302R3 – Losses of a Corporation” (Author: Government of Canada)

January 2020