Author: Michael Wong (Norton Rose Fulbright Canada LLP)
Acquiring control of another company has several tax consequences, many of which are potentially adverse for the acquiring party. It is important to consider them early on in the acquisition process.
Generally, an acquisition of control occurs when a person or entity acquires sufficient shares of a company so that they have the right to a majority of the votes in an election of the company's board of directors. The Income Tax Act does not define "control", but it may be:
De jure: where the controlling party controls sufficient shares based on the company's share register, constating documents, or any unanimous shareholder agreement; or
De facto: where, in some other way, a party has the ability to effect a significant change in the board of directors or the powers of the board of directors, or an ability to directly influence the shareholders who elect the board.
Most of the tax consequences for acquisitions of control are based on the acquisition of de jure control. Some of the more important ones are:
The tax year of a corporation is deemed to have ended immediately prior to the time control is acquired. The corporation must file a return for that year;
Corporations cannot deduct non-capital loss carry forwards unless the business that gave rise to the loss is carried on by the corporation for a profit or with a reasonable expectation of profit. Even then, the losses are deductible only against the corporation's income from the same or a similar business;
A corporation's net capital loss carry forwards expire; and
Important capital loss consequences may apply. For instance, capital losses cannot be carried forward. Elections are available to help ensure these losses are used.
Tax planning can therefore play an important role in the acquisition of control of a corporation and deserves early consideration.
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.