Acquisitions of Control and Losses

“”non-capital losses often include losses from property”.”

The Income Tax Act contains rules that restrict the use of corporate tax losses after an acquisition of control (“AOC”).  Generally, where there is an AOC the taxation year of the corporation is deemed to end immediately before the time that control is acquired and a new taxation year is deemed to begin at that time.

As well, some pre-AOC losses expire and some can be used after the AOC, but in a restricted manner.  For instance, net capital losses and allowable business investment losses all expire after an AOC.  There is an election that allows a taxpayer to write up certain types of property to their fair market value prior to the AOC in order to allow the corporation to utilize expiring or restricted losses.

Non-capital losses do not expire but become restricted in their use after an AOC.  In order for non-capital losses to be deductible after an AOC:

  1. The same business that created the loss must continue to be carried on by the corporation for profit or with a reasonable expectation of profit throughout the year (in which the loss is being claimed); and
  2. the losses can only be used to offset income from that same business or a similar business that is carried on with a reasonable expectation of profit.

Interpretation Bulletin 302R3 ( provides the CRA’s interpretation of these complicated rules.

In situations where the loss business ceased operations before the AOC, the ability to use the non-capital losses after an AOC is less likely since the loss business was closed and, therefore, cannot be carried on by the acquiror.  There may be exceptions where there are short periods of dormancy.

Where the acquired company had been in receivership or bankruptcy, the conclusion is less clear as it will be a question of fact as to whether the receiver or trustee was carrying on the business or merely winding it down.

It is important to note that non-capital losses often include losses from property.  Since this component of any non-capital loss was not generated by business operations, it cannot be used after an AOC as the above noted conditions will not be met.  Similarly, non-capital losses that survive an AOC cannot be used against post-AOC property income or taxable capital gains since these types of income are not derived from a business.

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Cadesky Tax