Loss restriction event (LRE)

A buyer who acquires control of a corporation in a share purchase meets this term. The Act also defines an LRE for trusts, when a person becomes a majority-interest beneficiary or a group becomes a majority-interest group of beneficiaries, with exceptions in section 251.2. For the effect on a share purchase, see whether you keep loss carryforwards if you buy shares.

What the Act restricts

Under subsection 111(4), after an LRE no amount of a net capital loss for a year that ended before it is deductible for a year that ends after it. Under subsection 111(5), earlier non-capital and farm losses are cut off too, except the portion that may reasonably be regarded as a loss from carrying on a business, which is deductible only if that business was carried on for profit or with a reasonable expectation of profit throughout the later year, and only to the extent of income from that business and, in some cases, from another business substantially all of whose income came from similar properties or services. Subsection 111(4) also writes the adjusted cost base of capital property other than depreciable property down to fair market value where it was higher, subject to subsection 111(5.5).

What to ask

• Whether the deal gives the buyer control, or moves a majority interest in a trust
• Which losses the corporation reports on Schedule 4, and of what kind
• Whether the business that made the losses will keep running after closing