Under the Canadian income tax system, corporations are taxed on a stand-alone basis. A corporation may offset its non-capital losses against its own income, subject to the rules in the Income Tax Act (ITA), but it cannot directly deduct a loss incurred by another corporation. As a consequence, the overall tax payable by a corporate group may differ depending on whether business activities are conducted through a single corporation or through multiple corporations.
Corporate groups may enter into transactions that effectively allow losses in one group member to offset income in another, such as amalgamations, wind-ups, or intra-group financing transactions. However, these transactions can be complex, costly, or unsuitable where separate corporate entities must be maintained for commercial, financing, regulatory, or liability reasons.
The taxation of corporate groups — in particular, the ability to transfer losses within a corporate group — was the subject of two previous Department of Finance consultations. These consultations identified two main issues with respect to corporate loss transfers. First, provincial and territorial corporate tax bases could be adversely affected; and second, tax integrity concerns could arise.
The budget invites stakeholders to comment on the introduction of a corporate loss transfer rule.
Stakeholders’ submissions are encouraged to consider concerns identified in previous consultations regarding tax integrity and protecting the provincial and territorial tax bases. The basic design parameters of the loss transfer mechanism, and certain key considerations, are described below.
Qualifying corporate group
Loss transfers would be permitted in the following cases:
- between a parent corporation and a subsidiary corporation that is wholly owned, directly or indirectly, by the parent corporation; and
- between two subsidiary corporations that are wholly owned, directly or indirectly, by the same parent corporation.
Eligible corporations
The rule would apply only to corporations resident in Canada that are subject to tax under Part I of the ITA. However, certain types of corporations that are considered conduits for their shareholders or members (e.g. mutual fund corporations) would not be able to transfer or receive losses.
Eligible losses and annual joint election
The rule would permit current-year non-capital losses to be transferred. A corporation could elect to transfer all or part of its current-year non-capital loss.
The transferor and transferee would be required to make a joint election. The transferee would be permitted to deduct the elected amount in computing its income for the relevant taxation year. The transferor’s non-capital loss for the relevant taxation year would be reduced by the elected amount. Any portion of the transferred amount that is not deducted by the transferee in that year would not be made available for carryback or carryforward.
Provincial allocation
The corporate loss transfer rule could affect provincial and territorial tax bases if a loss arising in one jurisdiction were used to reduce taxable income allocated to another jurisdiction. As such, a loss arising in a province or territory could only be transferred to offset income arising in that same jurisdiction. In particular, the rule would be available only where:
- the transferor has a permanent establishment in only one province or territory;
- the transferee has a permanent establishment in only one province or territory; and
- the permanent establishments of the transferor and transferee are located in the same province or territory.
The government invites views on whether, and if so how, the rule could be broadened while protecting provincial and territorial tax bases.
Tax integrity
Allowing corporate loss transfers may give rise to tax integrity concerns. The purpose of a loss transfer rule would be to provide a more efficient mechanism by which income of a corporate group could be offset by non-capital losses of the group. However, applying a loss transfer mechanism to a group of corporate entities, each of which is taxed on a stand-alone basis, may result in other unintended tax benefits.
The government invites views on how the loss transfer mechanism should address tax integrity concerns.
Source: www.pwc.com
