Buying Shares of an Ontario Corporation: What Happens to Its Tax Losses?
When you buy the shares of an Ontario corporation, its tax losses do not simply carry on as before. Buying control is an acquisition of control, a loss restriction event, and the corporation's taxation year is deemed to end immediately before that time and a new year begins.
Net capital losses from years that ended before the event cannot be deducted in later years. Business losses from before the acquisition can still be deducted, but only if that business is carried on for profit or with a reasonable expectation of profit. Whether the losses are useful to you depends on the corporation's actual business after closing.
An asset purchase works differently. Your cost base comes from how the price is allocated among the assets, whatever the contract says. The seller corporation may owe tax on recaptured depreciation if it sells depreciable assets for more than their undepreciated capital cost. In a share purchase, the corporation's liability for unremitted source deductions stays with the corporation as it was. A lawyer or accountant can help compare the structures and plan due diligence.
Key takeaways
- Buying control of a corporation is a loss restriction event, and its taxation year is deemed to end immediately before that time.
- Net capital losses from years that ended before the event cannot be deducted in later years.
- Business losses from before the acquisition survive only if that business is carried on for profit or with a reasonable expectation of profit.
- In an asset purchase your cost base comes from the price allocation, while in a share purchase the corporation's liability for unremitted source deductions stays with the corporation as it was.