- A corporation that has had losses in prior years can generally carry certain of those losses forward to reduce its taxable income in future years, within rules set by federal tax law.
- Canadian income tax law includes anti-avoidance rules specifically triggered by an acquisition of control of a corporation, which is exactly what happens in a typical share purchase.
- An asset purchase is a completely different story: the buyer is purchasing specific assets, not the corporation itself, so the selling corporation's accumulated tax losses simply stay…
A corporation that has had a rough few years sometimes carries something a buyer finds attractive on paper: accumulated tax losses that could, in theory, shelter future income from tax. Before you factor those losses into your offer, it's worth understanding a basic principle of Canadian tax law — a change of control doesn't let a buyer simply inherit and use a target corporation's losses however it likes.
This article explains, in general terms, what happens to a corporation's loss carryforwards when its shares are sold, why an asset purchase is a completely different story, and why this belongs on your due diligence checklist rather than in your back-of-envelope valuation.
The specific rules here are technical and fact-dependent — this is the general shape of the issue, not a substitute for your accountant's review of the target's actual tax pools.
What Loss Carryforwards Are, and Why Buyers Notice Them
A corporation that has had losses in prior years can generally carry certain of those losses forward to reduce its taxable income in future years, within rules set by federal tax law. A target corporation with a large accumulated loss pool can look, at first glance, like a source of future tax savings for whoever ends up owning it, which is exactly why buyers ask about it during due diligence.
The General Rule: A Change of Control Restricts Them
Canadian income tax law includes anti-avoidance rules specifically triggered by an acquisition of control of a corporation, which is exactly what happens in a typical share purchase. Broadly, these rules exist to prevent a corporation's accumulated losses from being freely bought and sold as a standalone tax asset, separate from the business that generated them. In practice, that generally means:
- Certain types of losses may become restricted in how, or whether, they can be used going forward after the change of control.
- Continuing to use certain losses can depend on the purchased corporation carrying on the same or a similar business afterward, rather than simply owning the loss pool.
- The rules are technical, and how they apply to a specific corporation's specific loss pools requires a proper tax review — this is not a "read the balance sheet and assume it's usable" situation.
What Happens Instead in an Asset Purchase
An asset purchase is a completely different story: the buyer is purchasing specific assets, not the corporation itself, so the selling corporation's accumulated tax losses simply stay with the selling corporation. The buyer gets no claim to them at all, not a restricted version, none. If a target's loss pool is genuinely valuable to a buyer, that alone can be a real argument for structuring the deal as a share purchase rather than an asset purchase, alongside all the usual liability trade-offs that pull in the opposite direction.
Why Buyers Shouldn't Bank on Inheriting Usable Losses
A few reasons to treat a target's loss carryforwards as a bonus to investigate, not a number to build into your offer before it's confirmed:
- The restrictions triggered by a change of control are specific and technical, and not every loss survives them in a form the buyer can actually use.
- Even where losses do survive in some usable form, continuing to use them can be tied to conditions about the business's ongoing operations.
- A seller's own summary of available losses is not the same as a tax professional confirming what portion is actually usable by a new owner after the acquisition.
Where This Fits Into Due Diligence
Reviewing a target's tax filings and loss history is a standard part of due diligence on any share purchase, alongside corporate records, financial statements, material contracts, and the rest of the usual list. If a buyer is placing real value on a target's loss pool, that review needs to happen, with an accountant, against the corporation's actual tax history, before it shows up in the purchase price, not after closing when there's no room left to adjust.
Frequently asked questions
Do loss carryforwards disappear entirely when a corporation is sold?
Not necessarily entirely, but they can become restricted in how they're used going forward. Whether a specific loss pool remains usable, and to what extent, depends on the corporation's specific facts and needs a tax professional's review.
Does this apply to an asset purchase too?
No. In an asset purchase, the losses simply stay with the selling corporation because the buyer never owns that corporation at all. This is one of the clearer differences between the two deal structures.
Should a buyer pay extra for a target's accumulated losses?
Only after an accountant has confirmed what portion of those losses is actually likely to survive the acquisition and be usable afterward. Treat a seller's stated loss balance as a starting point for that review, not a number to price into the deal on its own.
Can the purchase agreement address this risk?
Yes. Representations about the corporation's tax filings and loss balances, combined with appropriate indemnities, are a standard way purchase agreements address tax-related uncertainty, including around loss carryforwards.
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