Principal Issues: [TaxInterpretations translation] 1) Will non-capital losses accumulated by a holding company before the acquisition of control of the company be deductible after the acquisition of control and after the amalgamation of the company with its subsidiary? 2) Would the CRA's answer be the same if two divisions were created in the amalgamated company?
Position: 1) Question of fact, unlikely that non-capital losses could be deducted after the acquisition of control in such a situation 2) Our answer would be the same.
Reasons: We are of the view that it would be reasonable to consider that the business which generated the losses ceased to be carried on after the amalgamation.
APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
14. Utilization of non-capital losses after acquisition of control and amalgamation
Assume the following hypothetical facts described chronologically:
- Holdco and Opco were CCPCs.
- All of the issued and outstanding shares of the capital stock of Opco were held by Holdco.
- Opco carried on a manufacturing business.
- Holdco provided management services to Opco through its employee (payroll, administrative management, etc.).
- Holdco had accumulated non-capital losses (“NCL”) over the years arising from the management services it had provided to Opco.
- On January 1, 2024, Holdco and Opco were subject to a loss restriction event consequent on an acquisition of control by Acquirco.
- Immediately following the acquisition of control, Holdco and Opco amalgamated to form a new corporation (“Amalco”).
- Following the amalgamation, the management activities performed by the Holdco employee prior to the amalgamation will be performed by the same employee, but within Amalco.
Questions to the CRA
(a) Will the NCLs accumulated by Holdco be deductible in computing Amalco's taxable income? Specifically, is the CRA of the view that the restrictions in subsections 87(2.1) and 111(5) would apply to preclude the use of Holdco's NCLs?
(b) Would the answer be the same if Amalco had 2 divisions within the same legal entity: a first division that carried on the manufacturing business; and a second division for management services, which would include the same services that were rendered by Holdco to Opco prior to the amalgamation? Each division would have a separate financial statement.
CRA Response to Question 14a)
First of all, it should be noted that the comments below relate to the CRA's opinion as to the application of subsections 87(2.1) and 111(5) in the context of the given situation and that they are not intended to deal exhaustively with all the tax consequences that could arise from the present situation.
In addition, as stated in the question, we understand that the NCLs in question are business losses of Holdco resulting from the management services it rendered and are not property losses that it would otherwise have incurred.
Generally speaking, subsection 111(5) limits the use of a corporation's NCLs in the event of an acquisition of control of the corporation at a given time. One of the conditions set out in paragraph 111(5)(a) in order for NCLs realized in a taxation year ending before that time to be used in a taxation year ending after that time requires that the business that generated the losses be carried on for profit or with a reasonable expectation of profit throughout the year in which the corporation wishes to deduct the losses.
As for subsection 87(2.1), the question of whether a business continues to be carried on after an acquisition of control is a question of fact that can only be resolved after an analysis of all the facts relating to a particular situation. Since the statement in this question only briefly describes a hypothetical situation, the CRA cannot take a definitive position on this issue. That said, on the limited basis of the facts submitted, we are of the view that it would be reasonable to consider that the business that generated the losses, namely the management services business that was carried on by Holdco prior to the acquisition of control and prior to the amalgamation of Holdco and Opco, ceased to be operated after the amalgamation. This conclusion is based in particular on our understanding that the management activities performed by the Amalco employee were intended solely to support the corporation in the manufacturing field, and did not in themselves represent the carrying on of a business. The NCLs accumulated by Holdco could therefore not be deducted in computing Amalco's taxable income.
However, we note that it may be possible, depending on the specific facts of a given situation, to implement tax planning that would allow all or part of Holdco's NCLs to be used prior to the acquisition of control.
CRA Response to Question 14b)
Our response would be the same as for Question 14(a). More specifically, based on the facts submitted, we are of the view that creating two divisions with a separate financial statement for the management services and manufacturing businesses would not change our conclusion stated above that it would be reasonable to consider that the management services business that was carried on by Holdco ceased to be carried on after the amalgamation of Holdco and Opco.
Laurence Gagné
October 10, 2024
2024-102895