Anonymised, illustrative composite. A father sold his custom-cabinetry manufacturer to his son at full value, financed by a five-year note. Every share changed hands, and none of the company's tax attributes were affected at all.
At a glance
The father had built the cabinetry business over three decades and wanted his son, who had worked in the shop for twelve years, to own it outright rather than inherit it eventually. They structured it as a genuine sale rather than a gift or an estate freeze: an independent appraisal valued the company at $1,900,000, the son paid a cash deposit at closing, and the balance was financed on a five-year vendor take-back note at a commercial interest rate. On paper it looked exactly like a sale to a stranger — full consideration, an arm's-length price, financing documents, security over the shares.
The company's balance sheet carried two attributes the family did not want to lose: $410,000 of non-capital losses from a difficult stretch a few years earlier, and $260,000 of undepreciated capital cost on the shop's equipment, both of which shelter future income if they survive intact.
An ordinary sale of 100% of a company's shares from one unrelated owner to another is a “loss restriction event” as defined in ITA s.251.2(2)(a): a taxpayer is subject to one if it “is a corporation and at that time control of the corporation is acquired by a person or group of persons.” That single event cascades: s.111(4) restricts and partly extinguishes capital losses, s.111(5) streams non-capital losses so they can only offset income from the same or a similar business going forward, and s.249(4), marginal-noted “Loss restriction event — year end,” forces the corporation's taxation year to end immediately before the change of control — a short year, an extra tax return, and a fresh clock on every time-limited attribute the company holds. On the face of it, the son's purchase of 100% of the shares looked like exactly the kind of transaction those rules are built to catch.
$1,900,000 purchase price against $410,000 of non-capital losses and $260,000 of UCC the family wanted preserved. None of those figures decided the outcome. What decided it was the relationship on the cap table before and after: father to son, not father to a stranger.
Read the unit. ITA s.256(7), marginal-noted “Acquiring control,” provides that “control of a particular corporation shall be deemed not to have been acquired solely because of” several listed events, the first of which is the acquisition of shares by “a particular person who acquired the shares from a person to whom the particular person was related” immediately before the acquisition. A son buying his father's shares is exactly that fact pattern — under ITA s.251(2), a father and son are related persons for all purposes of the Act, regardless of whether the sale is at fair value, at a discount, or financed on commercial terms. The relief does not depend on the deal being a gift or a bargain; it depends only on the relationship.
The reason this reaches every downstream consequence, and not just s.256(7) in isolation, is in its own opening words: the deeming applies “for the purposes of this subsection, of section 55, subsections 66(11), 66.5(3), 66.7(10) and (11), 85(1.2), 88(1.1) and (1.2), 110.1(1.2) and 111(5.4) and paragraph 251.2(2)(a)” — and paragraph 251.2(2)(a) is precisely the provision that says “the taxpayer is a corporation and at that time control of the corporation is acquired by a person or group of persons.” Because s.256(7) deems that no acquisition of control occurred, there is no loss restriction event under s.251.2(2)(a) at all — and because there is none, s.111(4)'s extinguishment of capital losses never engages, s.111(5)'s streaming of non-capital losses never engages, and s.249(4)'s forced year-end — itself triggered by “if at any time a taxpayer is subject to a loss restriction event” — never engages either. One deeming rule, applied at the root of the definition, protects every branch that grows from it.
The company's accountant filed the year's return on the basis that no loss restriction event had occurred: one continuous taxation year straddling the closing date, the $410,000 non-capital loss pool intact and unstreamed, the $260,000 of UCC untouched, none of the mechanical consequences of s.111 or s.249(4) applied. The father's five-year vendor note, secured against the shares he no longer owned, was the only lingering evidence that a sale had happened at all.
Had the buyer been an unrelated third party at an identical price, the same transaction would have forced a short taxation year with its own return, exposed the non-capital losses to the same-or-similar-business streaming test the moment they were used against different income, and put part of the loss pool through the s.111(4) capital-loss extinguishment analysis this file's sibling case describes. None of that is a defect in the general rule — it is what the rule is for. It simply does not apply to a sale between related persons, and treating this file's outcome as available to an arm's-length buyer would be the trap in reverse.
The tell here was not a red flag — it was the family relationship itself, sitting in plain view on the org chart the whole time. The same fact that makes a related-party deal harder to price at arm's length is the fact that saves its tax attributes. Ask who is on both sides of the signature line before assuming the ordinary change-of-control consequences apply.
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