A.

Loss Carry-Overs
The loss carry-over provisions for corporations are structurally the same as for
individuals:3 
Net capital losses incurred can be carried back three years and forward
indefinitely to the extent of taxable capital gains realized in those years.
Non-capital losses (business losses and property losses) incurred in a year can be
carried back three years and forward 20 years as a special reduction against any
other source of income.
Non-capital losses arising from allowable business investment loss can be carried
back three years and forward 10 years against any source of income.
As we examined the calculation for these items for individuals—and its application
to investment and business decisions—in Chapter 10, we will not repeat it here.
However, because of the nature of the corporate structure, certain aspects of loss
carry-overs apply to corporations only. We review these next.  
Change in control
Although a corporation is a separate legal entity, beneficial ownership of the
corporation can change when shares are transferred from one shareholder or group of
shareholders to another. This means that the carry-forward of unabsorbed losses may
be attractive to acquiring shareholders if they can use those losses against income
they can generate in the corporation. Whenever a new shareholder or group of
shareholders acquires control of a corporation, the unabsorbed losses being carried
forward may be restricted as to use or entirely eliminated.4 In general terms, a
change in control will affect the unabsorbed loss carry-over as follows:
The net capital losses that exist in the corporation at the time of change in
control are deemed to have expired. This is the case even though the corporation
may hold assets that have appreciated in value and that will create capital gains
in the future when a disposition occurs.
Non-capital losses that resulted from a business operation continue to be carried
forward but can be used only against income generated from the business that
incurred the loss and against income of a business that is similar to the business
that incurred the loss. This is a significant departure from the normal carry-
forward rules, which permit non-capital losses to be offset against any other
source of income. Further, the business that incurred the loss must be carried on
at a profit or with a reasonable expectation of profit throughout the taxation year
in which the losses are deducted. Any losses incurred by the corporation after the
change in control can be carried forward in the normal manner against any other
source of income.
The above loss restrictions will also be applied when an acquiring person (or group
of persons) does not obtain control but acquires more than 75% of the market value
of all outstanding shares of the corporation and it is reasonable to conclude that
one of the main reasons control was not acquired is to avoid these restrictions.5
The purpose of the restrictions is to prevent the transfer of unabsorbed corporate
losses to other parties through a change in share ownership. However, the fact that
business loss carry-overs can be used against income from a similar business opens
up a narrow opportunity with respect to business sales and acquisitions. For
example, the shareholders of a corporation that has significant unabsorbed business
losses may achieve a higher price on their shares by selling them to a party that
operates a similar business and can take steps to combine some of its profitable
operations with those of the corporation it is acquiring (see Chapter 14). When
conducting a search for a possible buyer, it is important to target potential
buyers who are in the same or a similar line of business.6 Similarly, profitable
businesses that are considering an expansion should seek out corporations in a
similar line of business that have substantial unabsorbed business losses that can
be merged with their profitable operations. In this context, the term “similar
business” is subjective. However, it does include vertical-integration
acquisitions, where, for example, a chain of retail stores acquires a manufacturing
operation to produce products sold to the retail operation.7
Page 426
These restrictions relate to the treatment of losses that have already occurred but
have not been absorbed by later, profitable operations. When a change in share
ownership occurs, the acquired corporation may own certain assets that have
declined in value. In such cases, after the ownership change, additional losses
will occur if those assets are sold. For example, a corporation may own depreciable
property that has an undepreciated capital cost for tax purposes of $500,000 but is
actually worth only $400,000. After a change in control, the new owners can sell
the asset and create a terminal loss of $100,000; this loss would not fall under
the restrictions reviewed earlier.
To ensure that unrealized losses do not escape the restrictions, the corporation’s
year-end is deemed, for tax purposes, to end immediately before the control
change.8 This adds any operating losses since the previous year-end to the non-
capital losses, which makes them subject to the restrictions. After the acquisition
of control, the corporation can select a new year-end for tax purposes. Also,
depreciable property and other capital property are all deemed to have been sold at
their market value if that value is below the tax cost.9 This means that in the
above example, the depreciable property would be deemed to have been sold for
$400,000, the result being a realized terminal loss of $100,000 that is also
subject to the restrictions. These further adjustments to the control rules are
indicative of the Department of Finance’s commitment to placing limits on loss
transfers. A more detailed description of the acquisition of control rules is
provided below. It is important to recognize that these restrictions do not apply
when control is acquired by a related party (see Chapter 14).10
Summary of acquisition of control rules—An acquisition of control occurs when
control over the voting rights of a corporation (greater than 50% of the voting
shares) is acquired by an unrelated person or group of persons.11 
The tax implications resulting from an acquisition of control are summarized below,
followed by a brief sample calculation.
Year end – A taxation year-end is deemed to occur immediately prior to the date of
the acquisition of control.12 The corporation is required to file a tax return for
that period. If the period is less than 365 days, any tax rules relating to short
taxation years will apply such as the prorating of CCA and the $500,000 annual
limit for the small business deduction. The corporation is free to choose a new
taxation year (fiscal year-end).13
Inventory – At the deemed year-end, inventory is valued at the lower of cost or
market and any resulting loss is recognized for tax purposes.14
Accounts receivable – The normal reserve for bad debts is not permitted. Instead,
the corporation must examine each account receivable and claim any uncollectible
amount as a bad debt.15 Amounts written off that are subsequently received will be
added to income.16
Depreciable property – To the extent that the fair market value of property in each
class is less than the UCC of the class at the end of the deemed year (after the
CCA deduction for that year, if any), the difference is deemed to be a deduction of
CCA of that class for the year reducing the UCC accordingly. For capital gains
purposes, the original ACB is retained.17 Page 427
Non-depreciable capital property – To the extent that the fair market value of each
non-depreciable capital property is less than the adjusted cost base of that
property, the difference is deemed to be a capital loss for the period and a
reduction to the adjusted cost base.18 The loss can be offset against any capital
gains in the period or carried back to a previous year; however, it cannot be
carried forward. To alleviate the possibility that such a loss may be eliminated
forever, the corporation can elect to recognize accrued gains (if they exist) on
any non-depreciable or depreciable property, creating a capital gain that can
offset the capital loss created in the deemed year or any unused capital loss
carryovers from a previous year. It should be noted that if recapture occurs, it
can only be offset by current non-capital losses or non-capital loss carryovers.
However, the use of the losses to offset recapture may not be the best use of the
losses if the non-capital losses can be carried forward (albeit with restrictions
discussed above) to future years to reduce taxable income. Therefore, the election
is used most often on non-depreciable capital properties. The corporation can
choose an elected amount between the adjusted cost base and the fair market value
of the chosen property to create the desired gain. The elected amount then becomes
the new adjusted cost base of the property.19
Loss and donation carry-overs – While we reviewed the rules in this section
previously, we repeat them briefly here. On acquisition of control, net capital
losses, property losses, and allowable business investment losses expire and cannot
be used after the deemed year-end.20 Also, any unused donations cannot be carried
forward.21 Non-capital losses can be carried forward provided that the business
that incurred the loss is carried on with a reasonable expectation of profit
throughout the year that the loss carry-over will be deducted. If this condition is
met, such non-capital losses are deductible to the extent there is income from the
business that generated the loss and/or income from a business selling similar
products or providing similar services.22
You can use the acronym “LAPD” as a simplified way to remember the basic principles
behind these rules:
L  Loss carry-forward restrictions
A  Accrued losses must be realized (accrued gains realized optionally) 
P  Prorate CCA and the annual limit for the small business deduction
D  Deemed year-end immediately before the acquisition of control