economic acquisitions of control
The Income Tax Act (Canada) (the "Tax Act") contains rules (the "loss trading rules") limiting the ability of a corporation to utilize losses and other tax pools that have arisen or were acquired prior to the acquisition of control of the corporation by an unrelated person. Control of a corporation for this purpose is generally considered to be the ownership of shares having the majority of votes in the election of the board of directors. Some taxpayers have sought to avoid the application of these rules by not acquiring voting control of a corporation which has losses or other tax pools, but instead acquiring shares which entitle the taxpayer to receive substantially all the economic value of the corporation.
Budget 2013 seeks to eliminate these types of economic loss company acquisitions by proposing new rules which deem there to be an acquisition of control for the purpose of the loss trading rules if a person, or a group of persons, acquires shares of a corporation representing more than 75% of the fair market value of all the shares of the corporation without acquiring control of the corporation and it is reasonable to conclude that one of the main reasons that control was not acquired was to avoid application of the loss trading rules.
loss trading rules extended to trusts
The loss trading rules have never applied to the "acquisition" of a trust. This makes sense, as control of a trust rests with its trustees and the very essence of a trust is that the benefits of the property of the trust are divorced from the trustees that control it. However, as trusts have increasingly been used as a vehicle to carry on business, the absence of a set of loss trading rules applicable to trusts has permitted losses that accrued while the property of the trust was held for the benefit of one group of beneficiaries to be utilized when the trust property is held at a later time for a different group of beneficiaries.
In Budget 2013, the Government announced its intention to introduce a set of loss trading rules applicable to trusts. The new trust loss trading rules will be similar to the existing loss trading rules applicable to corporations, except that instead of an acquisition of control causing the application of the loss trading rules, the triggering event, called the "loss restricting event", is a person, partnership or a group becoming a "majority interest beneficiary" of the trust. A majority interest beneficiary is a beneficiary or a group of beneficiaries which has an interest in the income or capital of the trust which exceeds 50% of the fair market value of all of the income or capital of the trust.
Similar to the corporate loss trading rules, if the new majority interest beneficiary is affiliated with the former majority interest beneficiary, the new rules will not apply. The Budget Papers indicate that many types of typical transactions or events involving changes in the beneficiaries of personal (e.g., family) trusts will not result in the application of the new loss trading rules, however the exceptions have not yet been fully laid out. The Government has invited submissions on the application of the rules for 180 days after March 21, 2013.
After a loss restricting event, a trust will not be able to deduct any capital or non-capital losses that arose before the loss restricting event unless, in the case of non-capital losses, the trust carries on the same business that generated the non-capital losses with a reasonable expectation of profit after the loss restricting event and will only be able to apply the non-capital losses against income from that business or a similar business.
taxation of corporate groups
Taxpayers have for a long time requested the Government introduce some form of consolidated taxation amongst corporate groups, to allow losses and gains within a corporate group to be netted. While the Tax Act contains numerous rules to prevent transferring losses between unrelated parties, it generally permits related corporations to conduct transactions which effectively transfer losses between them. The difficultly is that these transactions can be complex and expensive to implement. As it is the Government's policy to allow the transfer of losses between related parties, legislative amendments to allow it to be done simply and cheaply makes sense. The Government in its 2010 and 2012 budgets indicated a willingness to consider this sensible approach. Unfortunately, the provinces were unwilling to go along, each province being concerned that losses which arose in a different province would be used to offset the income earned in its jurisdiction. As stated in the Budget Papers:
The Government conducted extensive public consultation on this issue. … Provinces and territories signaled their concerns about the possibility that a new system of corporate group taxation could reduce their revenues. … The Government has determined that moving to a formal system of corporate group taxation is not a priority at this time.
The sad result is that consolidated tax reporting will not be making an appearance on the tax returns of Canadian corporations for the foreseeable future.