Non-capital loss

Buyers of a company meet this term when the target has losses carried forward. The CRA says a non-capital loss for a year generally includes any loss incurred from a business, among other sources. Subsection 111(8) of the Act sets the formula that produces the amount.

How the Act limits it

Under paragraph 111(5)(a), when a taxpayer is subject to a loss restriction event, which includes an acquisition of control, no amount of a non-capital loss for a year that ended before that time is deductible for a year that ends after it. The exception covers the portion that may reasonably be regarded as a loss from carrying on a business. It is deductible only if that business is 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 deriving substantially all its income from similar properties or services.

What to ask

• Which losses the seller says exist, and how they are shown in the filed returns
• Whether the business that generated the losses will continue, since the exception depends on it
• Whether the plan could be challenged, as the CRA’s GAAR page says the object, spirit and purpose of subsection 111(5) is to prevent loss trading between unrelated parties

See whether you keep loss carryforwards when you buy shares.