Short taxation year

Buyers and sellers meet a short year around closing, since the target’s old year ends and a new one begins. Subsection 249(4) deems the year that includes a loss restriction event to end immediately before it, except for certain foreign affiliates, and subsection 249(3.1) does the same when a corporation becomes or ceases to be a CCPC other than because of an acquisition of control covered by subsection 249(4). Each is subject to an election in paragraph 249(3.1)(c) or 249(4)(b). The CRA’s T2 guide describes both. See deemed year-end on acquisition of control.

Effects of a short year

• The CRA says capital cost allowance generally has to be prorated when a tax year is shorter than 12 months
• A business limit under paragraph 125(5)(b) is prorated for a year shorter than the stated number of weeks
• Ask whether a separate return is due for the short year
• The CRA’s instalment guide has special rules for short years

A corporation formed by amalgamation also has its own first year-end rules in the T2 guide. Ask who files the return for the short year and how the agreement allocates the tax. Both the Act and the guide have elections and exceptions, so read the sections that apply.