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Loss carry-over provisions for corporations are the same, structurally, as they are for individuals.
Net capital losses can be carried back 3 years and forward indefinitely to the extent of taxable
capital gains realized in those years.
Non-capital losses (business and property losses) incurred in a year can be carried back 3 years
and forward 20 years as a special reduction against any other sources of income.
o Non-capital losses arising from ABIL can be carried back 3 years and forward 10 years
against any source of income.
Change in Control
Whenever a new shareholder or group of shareholders acquires control of a corporation, the
unabsorbed losses being carried forward may be restricted as to use or entirely eliminated. In
general terms, a change in control will affect the unabsorbed loss carry-over as follows:
1. The net capital losses that exist in the corporation at the time of change in control are
deemed to have expired. They will hold the assets that have appreciated in value and that
will create capital gains in the future when a disposition occurs.
2. Non-capital losses that resulted from a business operation continues to be carried forward
but can be utilized only against income generated from the business that incurred the
loss. Further, the business that incurred the loss must be carried on at a profit or with a
reasonable expectation of profit throughout the taxation year in which the losses are
deducted. Any losses incurred by the corporation after the change in control can be
carried forward in the normal manner against any other sources of income.
The fact that business loss carry-overs can be utilized against income from a similar business
opens up a narrow opportunity with respect to business sales and acquisitions.
These restrictions relate to the treatment of losses that have already occurred but have not been
absorbed by later, profitable operations.
o After a change in control, the new owners can sell assets that they owned previously and
create a terminal loss; but these losses would not fall under the restrictions.
To ensure that unrealized losses do not escape the restrictions, the corporations year end is
deemed, for tax purposes, to end immediately before the control change.
o Depreciable property, eligible capital property, and other capital property are all deemed
to have been sold at their market value if that value is below the tax cost.
These restrictions do not apply when a related party acquires control.
Acquisition of Control Summary of Rules Occurs when control over the voting rights of a
corporation (more than 50%) is acquired by an unrelated person or group. The tax implications:
o Year-End: Taxation year-end is deemed to occur immediately prior to the date of the
acquisition of control. If the period is less than 365 days any tax rules relating to short
taxation years will apply such as the prorating of CCA. Choose a new taxation year-end.
o Inventory: At the deemed year-end, inventory is valued at the lower of cost or market and
any resulting loss is recognized for tax purposes.
o Account Receivable: The normal reserve for bad debts is not permitted. Instead, the
corporation must examine each A/R and claim any uncollectible amount as a bad debt.
Amounts written off that are subsequently received will be added to income.
o Depreciable Property: Extent that the FMV of property in each class is less than the UCC
of the class at the end of the deemed year (after the CCA deduction for that year), the
difference is deemed to be a deduction of CCA of that class for the year reducing the
UCC accordingly. For capital gains purposes the original ACB is retained.
o Cumulative Eligible Property (CEC): Extent that 3-quarters of the FMV the eligible
capital property is less than the balance of the CEC account (after CECA deductions for
the deemed year), the balance is written down by that difference.
Non-Depreciable Capital Property: Extent that the FMV of each non-depreciable property
is less than the ACB of that property, the difference is deemed to be a capital loss for the
period and a reduction to the ACB. The loss can be offset against any capital gains in the
period or carried back; however, it cannot be carried forward.
If recapture occurs, it can only be offset by current non-capital loss carryovers.
o Loss Carry-Overs: On acquisition of control net capital losses and ABIL expire and
cannot be used after the deemed year-end. Also, any unused donations cannot be carried
forward.
o Read the Situation and Analysis on Page 424-425 to understand the rules.
Loss Utilization in Corporate Groups
The profits and losses of the various corporations can be combined if the operations of each
corporation are formally merged and housed in a single corporate entity.
If the new venture is going to incur losses in the initial years, a branch structure would permit the
losses to be used immediately against the profits of other operations; the subsidiary structure, on
the other hand, would separate the profits of the existing operations from the losses incurred by
the expansion activity.
o
Public Corporations: Federal tax is reduced by 13% of the corporations TI other than its income
from manufacturing and processing activities (M&P), which is a separate reduction.
CCPC: Federal tax is reduced by 13% on active business income that is above the annual limit to
which small business deduction applies. This restriction does not apply to the tax on its
investment income or personal service business income.
2
% of the corporations investment income and is fully refundable to the
3
Formula
MC + ML
Total Buisness Profits=Manufacturing Profits
TC +TL
Provincial Tax
Certain provinces apply a reduced rate of tax to the first $500,000 of active business profits of
CCPC, and some reduce the rate for manufacturing profits.
Ontario, the primary rate of 11% is reduced to 4.5% for active business profits that
qualify for the federal small business deductions and to 10% for manufacturing.
A corporation incorporated or based in a particular province will be taxed entirely in that province
unless it carries on business in another province through a permanent establishment.
o If that exists, the profits attributable to that locations are based on the ratio of sales in the
province to total sales, and the ratio of wages paid in the province to total wages,
multiplied by the total business profits of the whole corporation.
o