What happens to a company’s capital losses after a share purchase?

A net capital loss is the corporation’s own, and a share purchase changes who owns the shares, not which corporation incurred the loss. If the purchase means control of the corporation is acquired, however, the Income Tax Act restricts how that loss can be used from that moment. The sections below describe what the Act says; the corporation’s accountant should apply them to its actual losses.

What the Act does to existing net capital losses

A corporation is subject to a loss restriction event under paragraph 251.2(2)(a) if, at that time, control of the corporation is acquired by a person or group of persons. Subsection 111(4) then applies, subject to subsection 111(5.5). Under paragraph 111(4)(a), no amount of a net capital loss for a year that ended before that time is deductible in computing taxable income for a year that ends after it. Paragraph 111(4)(b) closes the other direction: no amount in respect of a net capital loss for a taxation year that ends after that time is deductible in computing taxable income for a year that ended before that time.

Losses not yet realized on capital property

Paragraph 111(4)(c) reduces the adjusted cost base of each capital property, other than depreciable property, by the amount it exceeds fair market value immediately before that time. Paragraph 111(4)(d) deems that amount to be a capital loss of the year that ended immediately before that time. Subsection 111(5.5) says paragraphs 111(4)(c) to (f) do not apply if at that time the taxpayer becomes or ceases to be exempt from tax under Part I of the Act on its taxable income.

The election in paragraph 111(4)(e)

The corporation may designate a capital property, other than the properties that paragraph excludes, in its return for the year that ended immediately before that time, or in a prescribed form filed within the period the paragraph sets. The property is then deemed disposed of and reacquired, at proceeds the paragraph fixes by reference to fair market value, adjusted cost base and the amount designated. Whether to designate anything is a question for the corporation’s accountant. Under paragraph 111(5.5)(b), if it can reasonably be considered that the main reason for the loss restriction event is to cause paragraph 111(4)(d) to apply, that paragraph, paragraph 111(4)(e) and paragraph 111(4)(c) do not apply.

What to check or ask

• Which net capital losses are on the corporation’s filed returns, and for which years?
• Does the transaction count as an acquisition of control, or does subsection 256(7) deem control not acquired?
• Does the corporation hold capital property that is worth less than its cost, and would a designation be made?

For business losses, see whether you keep loss carryforwards in a share purchase. The terms are explained in net capital loss and acquisition of control.