Can I claim a terminal loss selling assets to an affiliated company?

A terminal loss can arise when you sell depreciable business assets. The Canada Revenue Agency says that on a sale of business assets you may have either a recapture or a terminal loss of capital cost allowance. Selling to an affiliated company is where the Income Tax Act restricts that deduction, because the equipment may keep working inside the same group.

The affiliated-person rule

The Income Tax Act has a rule for depreciable property that is transferred but stays with the seller or a person affiliated with the seller. If, on the 30th day after the sale, the seller or an affiliated person still owns the property or has a right to acquire it, the Income Tax Act can deem the seller’s proceeds to be the lesser of the property’s capital cost and a proportion of the undepreciated capital cost of its class, where that amount is higher than the price actually paid. A low price between related companies does not by itself create a deductible loss.

What happens to the loss

The loss is not simply erased. While the rule applies, the Act deems the seller to keep owning a property of the same class at a capital cost equal to the amount of the denied loss, so the loss is held back rather than taken now. That deemed property stays in place until an event the Income Tax Act lists, such as the first 30-day stretch throughout which neither you nor an affiliated person owns the asset or has a right to acquire it. Your accountant should map those events against your plans.

When the buyer is truly unrelated

If the purchaser is not affiliated with you and nobody connected to you keeps the assets or a right to acquire them, the rule has nothing to work on and the usual treatment applies. Our page on selling a business at a loss sets terminal losses beside capital losses and business investment losses.

Questions for your accountant

• Is the buyer affiliated with you under the Act’s own technical test in section 251.1, not the everyday meaning of the word?
• Will you, or anyone affiliated with you, still own the assets or hold a right to buy them back after closing?
• Would the same sale also trigger recapture on other classes of property, since both outcomes can arise together?