Suspended Losses for Corporations, Trusts and Partnerships
By Nizam Shajani, CA, MBA
November 20, 2020
While losses in your corporation, trust or partnership are undesirable from a conventional perspective, they can be valuable from a taxation standpoint. This is because depending on the type of loss incurred, it may result in lowering your tax obligation or even garnering a refund. However the tax act has a number of rules that may deny or restrict the use of those valuable losses. Many of them relate to losses incurred via transactions between affiliated persons and their corporations.
Affiliated persons and their corporation are considered a united economic unit and transfers between them do not represent a substantive change in economic interests. This includes (but is not limited to) an individual and their spouse or common law partner, a corporation and a person who controls that corporation or two corporations if the persons who have control of those corporations are affiliated (spouses or common law partners). Considering this, one of the significant stop loss rules is the suspended loss.
Suspended losses are the loss on disposition by a corporation, trust or partnership of a property (and for individuals who dispose of depreciable capital property) where identical property was acquired by an individual or affiliated person starting thirty days before the disposition and ending thirty days after the disposition. This is a sixty-one day period and includes ownership of the property or the right to acquire that property at the end of this period.
Unlike the superficial loss that relates to the loss on sale of property by individuals, the loss denied is not added to the cost base of the re-acquired property. Rather for corporations, trusts and partnerships, the loss is suspended until a triggering event takes place. As such, the loss is not lost – but rather suspended until sold to a party outside the affiliated group, there is a deemed disposition, a change in control of the corporation or the commencement of a wind-up of the company. Each of these events should be advised upon by a tax professional.
This also includes a situation where only a portion of the assets disposed of are re-acquired. In that case, a pro-rata calculation of the suspended loss is made and added to the adjusted cost base of the re-acquired asset.
As details can quickly become convoluted and there are a number of exceptions – proper record keeping and professional consultation is highly recommended.
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. © 2020 Shajani LLP