A company sitting on years of accumulated non-capital losses reads like a discount: buy it, run it profitably, and the first years of profit come out untaxed. Income Tax Act subsection 111(5) decides whether that is true, and it is triggered by the closing itself — not by anything the buyer does afterwards.
Key takeaways
SECTION 01 OF 10
A non-capital loss is the ordinary business loss of a year with no income to absorb it. It queues rather than vanishing. Paragraph 111(1)(a) allows a taxpayer to deduct its “non-capital losses for the 20 taxation years immediately preceding and the 3 taxation years immediately following the year”; subsection 111(3) allows an amount “only to the extent that it exceeds the total of” what has already been claimed against it.
The pool is never worth its face. A million dollars of losses is a million dollars of future deduction — worth the tax it saves, years from now, and only against income that arrives. Treadstone Law describes it as smoothing tax across uneven years: contingent, not banked.
SECTION 02 OF 10
Section 111 no longer says “acquisition of control”. It says a taxpayer is “subject to a loss restriction event”, and subsection 251.2(2) defines that: one arises where “the taxpayer is a corporation and at that time control of the corporation is acquired by a person or group of persons”.
Subsection 249(4), marginal note Loss restriction event — year end, then stops the clock: the year that would have included that moment “is deemed to end immediately before that time, a new taxation year of the taxpayer is deemed to begin at that time”. There is a stub year, a return for it, and tax payable on it — and under subsection 256(9) the moment is the start of the closing day unless the corporation elects otherwise.
Not every change in the share register counts. Subsection 256(7) applies expressly to paragraph 251.2(2)(a) and deems control “not to have been acquired solely because of” a listed set of acquisitions — among them shares acquired from a related person, or by an estate on a death. The CRA’s T2 guide: “there is no deemed tax year-end and no tax return is required to be filed.”
SECTION 03 OF 10
The marginal note is Loss restriction event — certain losses and expenses. Paragraph (a) opens flat: “no amount in respect of the taxpayer’s non-capital loss, restricted interest and financing expense or farm loss for a taxation year that ended before that time is deductible… for a taxation year that ends after that time”.
Everything a buyer cares about lives in the exception. The portion “as may reasonably be regarded as the taxpayer’s loss from carrying on a business… is deductible… (i) only if that business was carried on by the taxpayer for profit or with a reasonable expectation of profit throughout the particular year, and (ii) only to the extent of the total of the taxpayer’s income for the particular year from (A) that business” and, narrowly, a similar one. Paragraph (b) mirrors it, so losses arising after closing cannot be carried back into the profitable years before it.
SECTION 04 OF 10
The statutory words are “the taxpayer’s loss from carrying on a business”. A non-capital loss balance need not be made only of trading losses — it can hold losses from property, and allowable business investment losses from writing off shares or debt of a small business corporation.
The CRA’s bulletin IT-302R3 limits the deductible amount to the portion “that was incurred in carrying on a business”, adding: “losses attributed to property and allowable business investment losses expire”. Nothing the buyer does brings those back — which hits hardest at the holding company whose pool came from writing off a failed investment.
SECTION 05 OF 10
Subparagraph (i) is a condition on each year a deduction is claimed: “only if that business was carried on by the taxpayer for profit or with a reasonable expectation of profit throughout the particular year”. Two words carry it. That business — the one that produced the loss. And throughout.
Because it is tested year by year, it is not passed once at closing. A year spent mothballed while the buyer reorganises releases nothing, and the twenty-year window runs on; CRA’s factors expressly include “existence of a period or periods of dormancy”.
SECTION 06 OF 10
Subparagraph (ii) caps the deduction at income “from (A) that business” and, where properties were sold, leased, rented or developed or services rendered in carrying it on before the change, “(B)… any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services”.
That is a streaming rule, not a shelter. Profit arriving from anywhere else is taxed normally, so dropping a profitable second operation into the company achieves nothing unless limb (B) is met — and it is narrow: the comparator must be another business, substantially all of whose income comes from the similar properties or services.
SECTION 07 OF 10
Neither is defined in the Act. CRA’s position is that “Whether the corporation carried on ‘that business’ is a question of fact”, weighed on six factors: “(a) location of the business carried on before and after the acquisition of control, (b) nature of the business, (c) name of the business, (d) nature of income-producing assets, (e) existence of a period or periods of dormancy, (f) extent to which the original business constituted a substantial portion of the activities of the corporation in the allocation of time and financial resources.”
On the second phrase: “The word similar in the context of subsection 111(5) is generally interpreted as ‘of the same general nature or character’”, and the comparison “is primarily a question of fact”. There is no safe-harbour list of adjacent industries.
Weigh that source properly. IT-302R3 is dated 28 February 1994, carries an archived-content notice, and uses the older acquisition-of-control language. It is still CRA’s own reference: the current T2 Corporation Income Tax Guide, under “Calculating losses when there is an acquisition of control”, cites exactly two things — subsections 111(4) and 111(5), and IT-302.
SECTION 08 OF 10
The bulletin works one fact pattern three ways. Corporation B makes electrical appliances and has $120,000 of accumulated non-capital losses; A acquires control on 1 July. In X, A keeps B making appliances. In Y, B also makes A’s line. In Z, A “causes Corporation B to discontinue the manufacture of electrical appliances, to retool and to commence the manufacture of baby carriages” — and B is profitable at once.
CRA’s conclusion on Z is one sentence: “the business which gave rise to Corporation B’s losses was discontinued. Accordingly, no part of Corporation B’s $120,000 of non-capital losses may be deducted in any taxation year ending after July 1.” Z is the ordinary buyer with plans. Treadstone Law, from the buy side: use of the losses can depend on carrying on the same or a similar business afterward, “rather than simply owning the loss pool”.
SECTION 09 OF 10
Subsection 111(4) handles net capital losses and offers no same-business relief at all: none of a pre-event net capital loss is deductible after, none of a post-event one before. As Treadstone Law puts it, unused capital losses generally cannot be carried forward past the change in control.
Unrealised losses are dragged into the open at the same moment. Under paragraphs 111(4)(c) and (d) the excess of adjusted cost base over fair market value on non-depreciable capital property comes off ACB and is “deemed to be a capital loss… for the taxation year that ended immediately before that time”; subsection 111(5.1) writes undepreciated capital cost down to the class’s fair market value in that same stub year; and 111(5.3) denies the paragraph 20(1)(l) doubtful-debt reserve. Paragraph 111(4)(e) is the counterweight: a designation triggering a deemed disposition, so accrued gains can be realised there to absorb them.
The restriction follows the company forward, too: on a post-closing merger, change-of-control rules can restrict use of predecessor losses after amalgamation — the successor inherits the attributes and the limits together.
SECTION 10 OF 10
Every input is knowable before signing. The T2 filings carry Schedule 4, Corporation Loss Continuity and Application, whose Part 6 breaks the loss balance down by year of origin. Ask for it, then ask what the statute asks: which business produced each layer, how much of it is business loss rather than property loss, and whether that business still runs.
Then discount honestly. The usable figure is the business portion of the pool, times the tax rate, released only as fast as that business earns income, capped by the years left in the twenty-year window — and multiplied by the buyer’s own intentions, because a buyer who means to do what situation Z describes should price the pool at nil rather than argue two years later. On an asset purchase the question never arises: the losses stay with the seller.
Do not expect the agreement to repair it. A tax indemnity, as Treadstone Law defines it, covers pre-closing tax liabilities “that were not known, quantified, or accounted for when the deal was priced” — a hidden past liability, not a restriction the buyer’s own plan triggers. Nor does a pre-sale valuation reach tax attributes. And control itself is not the risk: control changes your power over the corporation, not its liabilities. Under section 111, control is what changes the tax.
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