Opportunities in a Down Market - Acquiring Control of a Corporation When Buying a Business
By Nizam Shajani, CPA, CA, MBA, Partner
The long downturn in Alberta’s economy has provided buying opportunities, and as prices for businesses decrease, this may pose as a prospect for those that have been laid. When contemplating the purchase of an organization, including the shares of a failing company for its tax losses – it’s advisable to seek the assistance of a qualified tax accountant. A profitable organization may believe it will benefit from amalgamating the losses of the organization being acquired, however there are conditions that must be considered before realizing these potentially significant tax benefits. However, purchasing a company with declining sales due to market fluctuations is prudent in a downturn.
When you purchase all or the majority of shares in a company, you acquire control of that organization. When a control of a corporation is acquired, there is a substantial impact to the tax attributes of that corporation. Your tax advisor will need to plan around this by making computations for a deemed year-end, the realization of accrued losses, loss restrictions and other restrictions.
Planned properly – both the buyer and seller can realize significant tax efficiencies. This should not be overlooked.
When an acquisition of control occurs, there is an automatic year end immediately before that acquisition. This requires year-end tax filings, even when the acquisition takes place in the middle of the tax filing year. The filings also require farther calculations to limit certain losses, credits and deductions from being realized by the new controlling person(s). The planning involved will reflect on the intent of the legislation in place as being there to limit the losses to the economic unit(s) that incurred those losses as well as provide incentives to promote the revival of a failing business.
However, if the business continues to carry on in the same or similar line – losses can be carried forward. Proper reporting and documentation is important here.
Understanding the intent of this legislation will help determine if and what losses of the company being realized will be permitted. As such, there is a requirement that the new controlling person or group continue the same or similar business of the company being acquired as well as have a reasonable expectation of profit.
Loss restrictions and other restrictions should also be reviewed by a professional prior to and after the transaction. The team at Shajani can provide you the appropriate guidance to negotiate the purchase and sale of your business and file these transactions appropriately with CRA on your behalf. We are here to help.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.