Last issue we discussed the concept of control and the various types of control referred to in the Income Tax Act. Legal or "de jure" control rests with the shareholder or group of shareholders that has the right to a majority of votes in the election of the board of directors. When de jure control passes from one shareholder or group of shareholders to another unrelated shareholder or group of shareholders, significant tax consequences arise.
The corporation has a deemed taxation year ending immediately before the time of the acquisition of control (AOC). Financial statements must be prepared and tax returns filed. Any accrued losses on inventory, accounts receivable, depreciable, non-depreciable and eligible capital property are considered to be realized. If the corporation has net capital losses, property losses or allowable business investment losses after the AOC then these losses will expire as do unused charitable contributions from gifts made after March 22, 2004. If any capital property has accrued gains then a special election can be made to trigger these gains to offset the expiring losses.
Business losses may only be used following the AOC if the business that generated the losses is carried on and carried on for profit or with a reasonable expectation of profit in the year of deduction. The losses can only be used against income from that particular business or a business selling similar properties or rendering similar services. If the AOC has resulted in two short taxation years, the time frame (10 taxation years) for using the losses will be shortened.
Any change in shareholdings of a corporation should be scrutinized carefully to assess whether a change in de jure control has occurred and the impact considered.
Information is current to October 15, 2004. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.