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Lecture 8

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Administrative Studies
ADMS 4562
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1ADMS 4562 LECTURE 8 NOTESLast updated November 7 2013 Topics1 Acquisition of Control and its Effect on Losses Planning to utilize lossesReadings and Recommended ProblemsFIT Chapter 11 11090 s 1114 to 11155 2494Review Questions 34 Multiple Choice Questions 1 to 4 Exercise 6See Problem set in separate document 2 AmalgamationsWindupsReadings and Recommended ProblemsFIT Ch 17 17070 17110 Review Questions 4 and 5 Multiple Choice Questions 1 and 2 Exercise 4 1ACQUISITION OF CONTROL AOC AND EFFECT ON LOSSES and PLANNING TO UTILIZE LOSSES Scenario Control of a corporation is acquired because shares are purchased ie more than 50 of the voting shares are acquired by a person or group de jure controlIf shares are purchased from a related person then there will not be an AOC subsection 2567Starting March 21 2013 and thereafter there will be a deemed AOC when more than 75 of the FMV of all shares of a corporation have been acquired from an arms length person but there has not been an AOC Note if less than 50 of the voting shares are acquired then without this deemed AOC there would not be an AOC This deemed AOC will only occur if more than 75 of the FMV of all shares are acquired from an arms length person and if one of the main reasons that control was not acquired is to avoid the loss restrictions that apply in an AOCWhat are the tax implications to the corporationWhat happens if the corporation has loss carryforwards and assets with unrealized lossesWhat tax planning can be done to utilize these lossesExamples from Canadian businessSears bought Eatons resulting in an AOCSleemans bought Upper Canada Breweries resulting in an AOCWhat tax rules applied when these takeovers happenedGeneralCopyrightJoanne MageeJason Fleming 2The relevant rules are in subsections 1114 to 11155 2494 101 and Reg 1801 See also IT 302R3 These are tax rules applicable to inventory and they apply to all yearends not just yearends triggered upon an AOCPurpose of these rules is to curb taxloss trading losses being used by other corporationsConcept of controlde jure or legal control Buckerfields case 1964 CTC 504 ExchThe Income Tax Act contains stoploss rules which restrict the utilization of corporate losses when control of a company is acquired The objective of these stoploss rules is to curtail the trading purchasing of loss companies ie companies with tax losses for their losses which can be used to reduce taxable incomeNote the 2013 federal budget has proposed that similar AOC rules apply to trusts when a nonrelated person becomes a majority interest beneficiary of the trust on or after March 21 2013 Hence the AOC loss denial rules can now apply to trusts Additional details about this budget change are beyond the scope of this courseSUMMARY OF TAX IMPLICATIONS AND PLANNING FOR CORPORATIONSAUTOMATIC RULES11 1 A Deemed Year End s 2494 Immediately before acquisition of control AOC ie the day before 2569 The new yearend is picked by the company and cannot exceed 53 weeks s 24911ImpactShort taxation year A tax return must be filed for the deemed year end stub period Some deductions that are based on a time period ie a full year are prorated using a daily proration such as the 500000 annual business limit for the SBD and CCA and CECA Non capital loss carryovers back 3 taxation years forward20 taxation yearsforward 10 years for losses incurred in taxation years from March 23 2004 to December 31 2005forward 7 years for losses incurred in taxation years ending before March 23 2004 short taxation years make losses expire one calendar year earlier Deadlines are moved up s 78 unpaid amounts s 152 tax returnsNote You could time your AOC to coincide with the subsidiarys regular yearend in order to avoid losing one year of loss carryforwardsHowever business considerations and not tax rules should typically be the main reason for an AOC and accordingly the timing of the AOC CopyrightJoanne MageeJason Fleming
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