Buyers model the price, the financing and the working-capital adjustment. Few model the fact that closing a share purchase ends the target’s taxation year on the spot. Income Tax Act subsection 249(4) does it automatically, and the bill — an extra return, an extra set of statements, deadlines that move, deductions that shrink — lands on the company the buyer now owns.
Key takeaways
SECTION 01 OF 10
A buyer who opens section 249 looking for those words will not find them. The marginal note on subsection (4) reads Loss restriction event — year end, and the text deems the taxation year “to end immediately before that time, a new taxation year of the taxpayer is deemed to begin at that time”.
The bridge sits elsewhere. Subsection 251.2(2), marginal note Loss restriction event, catches a taxpayer where “the taxpayer is a corporation and at that time control of the corporation is acquired by a person or group of persons”. No election, no threshold, no application to the Minister.
And what ends is a taxation year, which subsection 249(1) makes, for a corporation, “a fiscal period”. This is not a fiction sitting beside the books. It splits the company’s financial year in two.
SECTION 02 OF 10
Subsection 256(9), marginal note Date of acquisition of control, answers the next question. Where control is acquired “at a particular time on a day”, it is deemed acquired “at the beginning of that day and not at the particular time unless the corporation elects… not to have this subsection apply”.
So a deal funding at 3 p.m. on a Tuesday produces a stub year that ended at the end of Monday, and the closing day itself falls into the buyer’s first taxation year.
Electing out is deliberate: per the CRA’s T2 guide you “include a note with your return for the tax year ending immediately before control was acquired and enter the hours and minutes… at line 065” — a return the buyer usually controls. Note too that 256(9) excludes itself from deciding whether a corporation “is, at any time, a small business corporation or a Canadian-controlled private corporation”.
SECTION 03 OF 10
Paragraph 249(4)(b) holds a narrow relief. Where the year that would otherwise have been the last one ending before the acquisition “would… have ended within the seven-day period that ended immediately before that time”, it is instead deemed to end immediately before the acquisition, “provided that the taxpayer so elects in its return of income under Part I for that taxation year”.
If the target’s normal year end fell in the week before closing, that year can be stretched forward instead of being followed by a five-day stub. The CRA: “attach a letter to your return that says you are making an election under paragraph 249(4)(b)” (T2 guide). Seven days is little room — a reason to look at the year end before fixing the closing date, as Treadstone Law’s answer on sale timing within the fiscal year argues from the deal side.
SECTION 04 OF 10
Paragraph 150(1)(a) requires a return “for each taxation year”, filed “in the case of a corporation… within six months after the end of the year”. A deemed year end creates a taxation year; a taxation year creates a return. The T2 guide: “File a return for the tax year that ends immediately before control is acquired.”
It is a real return. CRA guidance on determining a tax year requires that the financial statements or GIFI attached “match the tax year of the return”. Somebody must close the books at a date set by the closing schedule — cut-off, accruals, a stock count, a second set of statements.
The deadline is easy to miscount, since a stub year rarely ends on a month end: “When the last day of the tax year is not the last day of a month, file the return by the same day of the sixth month after the end of the tax year” (T2 guide). Miss it and subsection 162(1) charges 5% of the tax unpaid at the deadline plus 1% per complete month, to twelve.
SECTION 05 OF 10
Six months is the filing deadline, not the payment deadline. The balance-due day definition in subsection 248(1) gives a corporation “two months after the day on which the taxation year ends”, extended to “three months” only where the small business deduction was claimed and the corporation “is, throughout the current year, a Canadian-controlled private corporation”.
That condition bites here. Through the stub year the target was still a CCPC, so three months can survive; but a non-resident or public buyer removes CCPC status from day one of the new year, shortening its balance-due day to two months. Treadstone Law’s CCPC explainer covers the test, not this consequence.
Instalments restart too. Subsection 157(1) requires payment “on or before the last day of each month in the year”, and the CRA adds that “the first payment is due one month minus a day from the starting date of the corporation’s tax year” (T2 guide). Treadstone Law’s instalment guide confirms the two/three-month split; its case study shows what an unadjusted instalment approach costs.
SECTION 06 OF 10
Capital cost allowance is the largest casualty. Regulation 1100(3), headed Taxation Years Less Than 12 Months, caps the deduction at “that proportion of the maximum amount otherwise allowable that the number of days in the taxation year is of 365”. The CRA’s arithmetic: multiply a full year’s maximum “by the number of days in the tax year divided by 365” (Chapter 3).
That splits one year’s CCA across two returns rather than destroying it — but it removes a full year’s shelter from whichever return the buyer was counting on. Regulation 1100(3) names exceptions, among them class 14 and class 15 property, timber limits and industrial mineral mines, so the split is not uniform across a mixed asset base.
The small business deduction is sharper. Under paragraph 125(5)(b), marginal note Special rules for business limit, where a CCPC “has a taxation year that is less than 51 weeks, its business limit for the year is that proportion… that the number of days in the year is of 365”. The threshold is 51 weeks, not 12 months. Two short years in one calendar year share, in substance, one annual limit.
SECTION 07 OF 10
An extra taxation year counts as one wherever the Act counts years. Paragraph 111(1)(a) allows “non-capital losses for the 20 taxation years immediately preceding” the year; paragraph 110.1(1)(a) allows gifts made “in the year or in any of the five preceding taxation years”. Splitting a fiscal year uses two slots instead of one — a counting consequence, separate from the loss-restriction rules, for which 249(4) is only the starting gun.
The reassessment window is quieter. Subsection 152(3.1) sets the normal reassessment period at four years for “a corporation other than a Canadian-controlled private corporation” and three years otherwise. An extra return means an extra assessment, an extra open window, and records to keep for a period the buyer never managed.
SECTION 08 OF 10
Paragraph 249(4)(a) does not only end a year. It adds that “for the purpose of determining the taxpayer’s fiscal period after that time, the taxpayer is deemed not to have established a fiscal period before that time”. The historic year end is wiped and the buyer picks a new one.
The only constraint is length: paragraph 249.1(1)(a) bars a fiscal period ending “more than 53 weeks after the period began” (371 days). The T2 guide confirms it: “the corporation can choose any tax year-end within the next 53 weeks”.
Outside an acquisition that choice is not free. The CRA requires a letter seeking approval to change a year end, but lists as an exception the case where “a person or group of persons acquired control of the corporation under subsection 249(4)”. Treadstone Law on changing a fiscal year end describes the ordinary route — “the CRA needs to approve the change” — and its answer on choosing one notes it “involves filing a short-year return”.
SECTION 09 OF 10
Not every ownership change is an acquisition of control. Subsection 256(7) deems control not acquired in a list of related-party cases, and the T2 guide gives the common one: where shares pass to an estate on a death “there is no acquisition of control… As a result, there is no deemed tax year-end and no tax return is required to be filed.” The same generally applies to a transfer to a related person.
An asset purchase does not trigger it either: nobody acquires control of the vendor corporation, which runs its year to its normal end. The stub-year cost is specific to share deals.
A separate rule catches an easy miss. Subsection 249(3.1), marginal note Year end on status change, deems a year to end where a corporation “becomes or ceases to be a Canadian-controlled private corporation, otherwise than because of an acquisition of control”. A minority investment that removes CCPC status without transferring control still produces a stub year.
SECTION 10 OF 10
In Ontario there is one return: under the single administration agreement, corporations with a permanent establishment there “will file a harmonized T2… with the Canada Revenue Agency”. Alberta is different. Its circular CT-2R11 requires an AT1 “within six months from the end of the corporation’s taxation year”, requires “the same taxation year for Alberta tax purposes as it uses for federal tax purposes”, and applies special rules to corporations “subject to a change in control… that impose a deemed year-end for which an AT1 must be filed”. An Alberta target produces four returns in the transaction year, not two.
None of that is allocated by the Act, so the agreement must do it: who prepares the stub return, who signs it, who pays, who controls the positions in it. Treadstone Law on post-closing tax filings is right that “Closing day ends your ownership of the business, but it doesn’t end your paperwork”, though it does not reach the deemed year end. Its tax indemnity article covers the seller’s promise for “periods before closing”, and its answer on straddle periods warns they “depend on how the indemnity allocates responsibility”.
Which is where 249(4) quietly helps: because the statute ends the year at closing, there is far less to straddle. Treadstone Law’s case study on splitting a fiscal year at closing works that from the contract end without reaching the statutory rule — and a “change of control” clause in a lease or loan is a different animal again, as its article on those clauses explains.
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