Acquisition of Control in Canada: Definition, CRA Rules and Tax Implications

Imagine you are about to take a major step: acquiring control of a corporation. Such a transaction can transform your business, open new opportunities, and accelerate growth. But before moving forward, it is essential to understand the tax, legal, and strategic implications of this type of change.

In practice, an acquisition of control, also called a change of control, occurs when a new person or group holds more than 50% of the voting shares of the corporation. According to the Canada Revenue Agency (CRA), this event automatically triggers significant tax consequences: a deemed year-end, restrictions on tax loss carryforwards, and the obligation to file a new T2 corporate tax return (and a CO-17 in Quebec).

Whether you are purchasing shares, going through a merger, integrating a parent company, or reorganizing a partnership, each scenario comes with its own challenges and requires careful planning.

What is an Acquisition of Control?

An acquisition of control of a corporation occurs when a new person or group holds more than 50% of all voting shares. This change transfers decision-making power of the corporation and creates major tax consequences.

Immediate Consequences According to the CRA

As soon as there is an acquisition of control, the corporation is subject to:

• A deemed year-end (also called a short taxation year) immediately before the change;
• Restrictions on the use of prior tax losses;
• The obligation to file a new T2 corporate return (and a CO-17 in Quebec).

Common Cases of Change of Control

• Purchase or cancellation of shares;
• Business acquisition;
• Merger of multiple corporations;
• Liquidation.

Important Exception

Some transactions between related persons are not considered an acquisition of control, as provided in subsection 256(7) of the Income Tax Act.

The relevant control is legal control (de jure control), the legal ability to direct the corporation’s affairs, not simply a factual control.

Tax Consequences of an Acquisition of Control

An acquisition of control CRA ruling has major tax implications, including a deemed year-end, restrictions on the carryforward of net capital losses and investment tax credits, and the reduction of accumulated capital losses.

These rules are designed to prevent new owners from unduly taking advantage of prior tax losses after a change of control deemed year-end.

Deemed Year-End

When there is an acquisition of control, the corporation must close its taxation year immediately before the change. This is called a deemed year-end or short taxation year. This situation requires the corporation to:

• File a new T2 corporate tax return (and a CO-17 provincial return if in Quebec) within 6 months of the deemed year end.
• Pay any taxes owing within 2 months (or 3 months if the corporation is a CCPC meeting accelerated remittance conditions) following the deemed year-end.

This early year-end can be complex to manage, as it occurs immediately before the date the corporation is deemed to have undergone a change of control. Our tax accountants can help you prepare your corporate filings in the event of a deemed year-end.

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Restriction on Carryforward of Net Capital Losses

After an acquisition of control, net capital losses can no longer be carried forward to offset capital gains realized after the change. They must be used before the acquisition date to reduce gains realized in the same taxation year.

Restriction on Investment Tax Credits

Investment tax credits earned before the acquisition are also subject to restrictions.

They can only be applied if the same or a similar business continues. This limits the ability of a new owner to benefit from credits accumulated by the target corporation prior to the acquisition.

Reduction of Accumulated Capital Losses

Capital losses accumulated before the acquisition of control are adjusted. The cost of properties with unrealized losses is reset to their fair market value, which can reduce the amount of carryforward losses.

This measure prevents corporations from exploiting prior accumulated losses after a deemed year end change of control.

Same Rules Across Canada, Quebec Exception

The tax consequences of an acquisition of control are federal and therefore apply uniformly across all Canadian provinces and territories.

• Ontario, Alberta, British Columbia, and other provinces/territories: only one federal T2 return, administered by the CRA, is required.
• Quebec: double filing → a T2 federal return with the CRA and a CO-17 provincial return with Revenu Québec.

In conclusion, the tax impacts of a change of control deemed year-end are consistent across Canada. The only difference is in Quebec, where a separate provincial return must also be filed.

Post-Acquisition Management Strategies

An acquisition of control does not end with the transaction. Effective post-acquisition management is essential to ensure a smooth transition and reduce tax risks. Key strategies include:

Corporate Reorganization

Following a change of control, it is often necessary to review the management structure to:

• Redefine roles and responsibilities;
• Adapt the operational strategy;
• Align the goals of the acquired corporation with those of the new shareholder and each related entity.

A well-planned reorganization facilitates integration and improves performance.

Due Diligence

Post-acquisition due diligence ensures the financial and tax implications are properly assessed. This involves:

• Reviewing financial statements and contracts;
• Verifying tax and legal obligations;
• Identifying risks linked to the corporation’s revenues and commitments.

Internal Communication

Clear communication with employees is critical to maintaining operational continuity.

• Explain upcoming changes;
• Clarify the impact on roles and responsibilities;
• Maintain motivation and productivity.

Tax Optimization

A deemed year end acquisition of control requires proactive tax planning. It is often advisable to:

• Use available tax credits effectively;
• Plan the use of tax losses before they expire;
• Review ownership structures to maximize tax benefits.

These measures should be implemented with the support of a CPA or tax advisor.

Voluntary Triggering of a Capital Gain

In some cases, it may be beneficial to trigger a latent capital gain before the change of control to avoid losing available losses. Practically, the corporation may establish a deemed disposition price between the adjusted cost base (ACB) and fair market value (FMV).

This results in recapture of depreciation based on the undepreciated capital cost (UCC). The new capital cost becomes equal to the deemed proceeds, which adjusts the ACB and preserves some tax losses.

This strategy is complex and should be assessed case by case with a CPA, as accounting and tax pitfalls exist (UCC, ACB, FMV, right to receive income).

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FAQ: Acquisition of Control in Canada

What is an acquisition of control?

An acquisition of control occurs when a new person or group holds more than 50% of a corporation’s voting shares. According to the CRA, this triggers a deemed year-end, restrictions on tax losses, and new filing obligations.

When there is an acquisition of control, what are the tax consequences?

The main consequences are a deemed year-end change of control, restrictions on loss carryforwards, and the obligation to file a new T2 return (and CO-17 in Quebec).

What is the difference between Quebec and Ontario?

The CRA rules apply across Canada. The only difference: in Quebec, corporations must file both a federal T2 and a provincial CO-17. In Ontario and other provinces, only the T2 is required.

Does an inactive corporation have to file after an acquisition of control?

Yes. Even an inactive corporation with no revenues must file after a change of control. Failure to do so can result in penalties and interest.

How can I avoid losing tax losses after a change of control?

One possible strategy is to trigger a capital gain before the acquisition of control to use available losses. This must be done carefully with the support of a CPA or tax advisor.

Who can help with an acquisition of control?

A CPA or tax specialist experienced in corporate taxation can analyze your situation, prepare the required T2 and CO-17 filings, and implement strategies to optimize tax outcomes.

Plan Your Acquisition of Control Carefully

An acquisition of control is a crucial step that requires careful planning and rigorous management of tax and strategic implications. Effective post-acquisition management, including reorganization, due diligence, internal communication, and tax optimization, is key to maximizing the benefits of a change of control.

If you are planning to sell your corporation or acquire an existing business, our CPAs and tax advisors support incorporated SMEs across Canada in the preparation of deemed year-end reports. Contact us to learn more and be connected with trusted partners.