Anonymised, illustrative composite. A commercial-property holding company carried $780,000 of net capital losses into its sale. Almost half of the pool survived the closing only because the company deliberately crystallized a gain against it first.
At a glance
The target held three commercial leasehold properties and a modest equipment-leasing book. Years earlier it had invested in a subsidiary that failed, realizing a capital loss the company carried forward ever since — $780,000 of unused net capital losses sitting on its tax attributes at the time the sale agreement was signed. One of the three properties, an office building purchased well below its current value, carried roughly $340,000 of unrealized capital gain the company had never triggered because there was no reason to.
The buyer was acquiring 100% of the shares. Nobody on either side treated the loss pool as especially significant during the early stages of the deal — it read, on the financial statements, like a straightforward deferred tax asset the buyer would simply inherit along with everything else.
A share purchase that changes who controls a corporation is, for tax purposes, a “loss restriction event.” ITA s.111(4), marginal-noted “Loss restriction event — capital losses,” does not merely restrict how the target's net capital losses can be used after closing — it kills them outright, in both directions: “no amount in respect of a net capital loss for a taxation year that ended before that time is deductible in computing the taxpayer's taxable income for a taxation year that ends after that time”, and the mirror rule blocks a post-change loss from sheltering pre-change income. Unlike non-capital losses, which survive a change of control in a restricted, streamed form under the companion rule in s.111(5), a corporation's net capital losses simply do not carry through a loss restriction event at all.
$780,000 of net capital loss carryforward, and $340,000 of unrealized gain available to absorb it. The arithmetic is unforgiving: without an accrued gain to crystallize before closing, the loss pool has nothing to attach to, and the statute does not let it wait around for a future gain after the fact. At best, on these facts, $340,000 of the pool was rescuable. The remaining $440,000 had no offsetting gain anywhere on the balance sheet and was always going to be lost.
Read the unit. This is a corporate-level, one-time-only mechanic, not an ongoing carryforward question. s.111(4)(e) lets the corporation, immediately before the change of control, designate a capital property it held at that time and elect into a deemed disposition at a value the corporation itself chooses — between the property's cost and its fair market value — crystallizing exactly as much gain as the corporation wants to trigger, up to the accrued amount, and no more. The designation is filed “in its return of income under this Part for the taxation year that ended immediately before that time or in a prescribed form filed with the Minister on or before the day that is 90 days after the day on which a notice of assessment of tax payable for the year or notification that no tax is payable for the year is sent to the taxpayer.” There is no route to make the election after that window has closed.
Once designated, “the taxpayer is deemed to have disposed of the property”, and the proceeds of that deemed disposition are “proceeds of disposition equal to the lesser of” the property's fair market value and the taxpayer's own elected amount — capped by, but not required to reach, the full accrued gain. The corporation is then deemed to reacquire the property at that same amount, so its cost base steps up by exactly the gain that was triggered. Nothing about the property physically changes hands; the transaction exists on paper, timed to land in the corporation's own last pre-closing taxation year, where the crystallized gain can still be offset by the net capital losses that are about to become unusable.
The vendor's accountant designated the office building at an elected amount equal to its full fair market value, triggering the $340,000 gain in the return for the corporation's taxation year ending immediately before closing, and offsetting it against $340,000 of the net capital loss pool in that same return. The building's cost base for the buyer going forward stepped up by the same amount. The remaining $440,000 of net capital losses was extinguished on closing, exactly as s.111(4)(a) requires, with no election available to save it because there was no further accrued gain anywhere in the corporation to crystallize against it.
Missing the designation window would not have merely capped the rescue at a smaller number — it would have forfeited the entire $340,000 that was in fact recoverable, along with the $440,000 that never had a chance. A buyer who assumed the loss pool would simply carry forward post-closing, the way an ordinary tax attribute does, would have discounted the target's value for a $780,000 asset that in fact evaporated entirely at the moment of closing unless someone acted on it beforehand.
The tell was that nobody had asked, early enough, what accrued gains the target actually held. A loss carryforward is only as valuable as the corporation's ability to generate income — or, in the narrow pre-closing window s.111(4)(e) opens, gain — to absorb it against. Price the loss pool by what it can actually be used against before closing, not by its face value on the trial balance.
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