In the current economical context, many investment portfolios are in a net loss position. This reality requires vigilance in connection with certain transactions.
In a situation involving the transfer of investments with accrued losses between “affiliated” persons within the meaning of the Income Tax Act (Canada), many rules can affect the treatment of the losses arising as a consequence of the transfer. These rules are complex and generate different consequences depending of the nature of the entity proceeding to the transfer, the nature of the relation between the persons involved, the holding period of the investments or the subsequent disposition of the investments.
For example, if an individual transfers investments with accrued losses to his holding company, the loss realized by the individual will be denied and his holding company will acquire these investments at the initial cost of the individual. On the other hand, if the holding company disposes of the investments within Thirty (30) days after their acquisition, the loss on the initial transfer will no longer be denied to the individual and will thus be realized by him. In the event that the whole investment portfolio is transferred to the holding company, including investments with accrued gains transferred on a rollover basis, then the individual would realize the losses while the company would hold the assets with the accrued gains.
If, on the other hand, the transferor is rather a company, a partnership or a trust, the rules are different. Indeed, a loss that occurs on a transfer to an “affiliated” company will be “parked” with the transferor and will only be available to the transferor (and not to the company benefiting from the transfer) once the investment is no longer owned by a person “affiliated” to the transferor. Once again, if a combination of investments with accrued losses and investments with accrued gains is transferred, accrued losses and accrued gains will now be in the hands of two different persons (in this case, it does not matter whether the investments are disposed of or not within the Thirty (30) days to a “non affiliated” person).
The current context can however help realizing aims that would not be achievable in other circumstances, such as, for instance, the transfer of an investment portfolio without tax consequences to a discretionary family trust established for assets protection purposes.
Other rules should also be kept in mind when in presence of investments carrying accrued losses, among other in the event of an acquisition of control or an amalgamation.
ACQUISITION OF CONTROL
One of the consequences of an acquisition of control of a company is the immediate realization of all the accrued capital losses of the company. It is then possible to generate capital gains on the company’s assets that have accrued gains (without the necessity of disposing of these assets) and to carry back the excess losses against capital gains from prior years. However, it is not possible to carry forward these losses against capital gains that may be realized by the company after the acquisition of control.
nother consequence of an acquisition of control is the impossibility of carrying back losses realized after the acquisition of control against capital gains realized before the acquisition of control.
An acquisition of control of a company does not occur only on a sale of shares to a third party. Internal reorganizations can also trigger acquisitions of control for income tax purposes. As an example, a simple change of trustees can give rise to an acquisition of control of a company controlled by a trust.
Generally, it is not possible to carry back future losses of the new company resulting from the amalgamation against income generated prior to the amalgamation by the amalgamating companies. However, it is possible to structure an amalgamation in such a way as to benefit, to a certain extent, of losses carry back.