An unrelated buyer is acquiring control of my client corporation. What are the tax consequences, and what should we do before closing?
As of 2026, an acquisition of control ends the corporation's tax year immediately before control changes (ITA 249(4)), so file a separate T2 for the short year. Net capital losses expire, accrued capital losses and excess UCC are written down in that year, and non capital losses survive only against income from the same or a similar business.
What does an acquisition of control trigger?
An acquisition of control is a loss restriction event for a corporation laws-lois.justice.gc.ca. That one event switches on a set of rules spread across the Act, most of them applied in the short tax year that ends immediately before control changes
laws-lois.justice.gc.ca.
| Consequence | ITA | What it means for your client |
|---|---|---|
| Deemed year end | 249(4) | Tax year ends immediately before control changes; file a T2 for the short year |
| Net capital losses | 111(4)(a), (b) | Losses from before the change can't be deducted after it, and later losses can't be carried back past it |
| Accrued losses on capital property | 111(4)(c), (d) | ACB is written down to fair market value; the writedown is a capital loss of the short year |
| Excess UCC | 111(5.1) | UCC above fair market value is deemed CCA claimed in the short year |
| Doubtful debts | 111(5.3) | No reserve; the reservable amount is deducted as a bad debt in the short year |
| Non capital and farm losses | 111(5) | Survive only if the same business continues, and only against that business's income |
| Optional gain designation | 111(4)(e) | Elect deemed proceeds up to fair market value to use losses before they die |
| ITCs | 127(9.1), (9.2) | Credits earned before the change only offset tax on income from the same or a similar business |
| SR&ED pool | 37(1)(h), 37(6.1) | Pool built before the change is limited to income from that business |
| Recently bought depreciable property | 13(24) | Property bought in the 12 months before is treated as bought immediately after |
The writedowns in rows 4 to 6 feed the short year's loss. Then the loss carryforward rules decide whether any of it survives. Net capital losses don't, so anything that lands there is gone laws-lois.justice.gc.ca. That's why the planning happens in the short year, before the restrictions bite.
When is control acquired, and when is it not?
Control here means de jure control. The CRA reads it as owning enough shares to carry a majority of the votes in electing the board of directors canada.ca. A trust has its own version: it has a loss restriction event when a person becomes a majority interest beneficiary, or a group becomes a majority interest group of beneficiaries
laws-lois.justice.gc.ca.
Section 256(7) lists acquisitions that don't count. The main ones: shares bought by or from a related person, shares acquired by an estate on death, and redemptions where everyone in control afterward was related to the corporation before laws-lois.justice.gc.ca. The CRA confirms that a transfer to an estate on death, or generally to a related person, gives no deemed year end and no extra return
canada.ca. An amalgamation can be an acquisition of control under 256(7)(b), so check that test on every section 87 amalgamation with unrelated predecessors.
Control moves down the chain too. Section 256(6.1) treats a subsidiary as controlled by whoever controls its parent laws-lois.justice.gc.ca, so a buyer who acquires the parent also acquires control of each subsidiary it controls. Each one gets its own deemed year end and its own short year T2.
Timing is set by 256(9). Control acquired during a day is deemed acquired at the beginning of that day, unless the corporation elects otherwise in its return for the year ending immediately before the acquisition laws-lois.justice.gc.ca. To elect, the CRA wants a note with that return and the hours and minutes on line 065
canada.ca. The deeming rule doesn't apply to CCPC or small business corporation status, which changes at the actual time.
Avoiding de jure control while handing the buyer the economics doesn't make the restriction go away. In Deans Knight (2023 SCC 16), the Supreme Court applied the GAAR, the general anti avoidance rule, to deny about $65 million of losses and credits where the investor got the functional equivalent of control without a majority of the votes scc-csc.gc.ca. See GAAR changes 2024 for the current rule.
The short year needs its own T2, with its own deadlines
Under 249(4)(a), the tax year that would include the acquisition ends immediately before it and a new year begins at that time laws-lois.justice.gc.ca. No CRA approval is needed. File a return for the year ending immediately before control is acquired, then the corporation can choose any tax year end within the next 53 weeks
canada.ca. Answer yes on line 063 of the T2 and enter the date control was acquired on line 065. More on picking the new date is on corporate tax year end.
| Item | Rule for the short year | Source |
|---|---|---|
| T2 due | Six months after the deemed year end | CRA filing rules |
| Balance due | Two months after it, or three for a qualifying CCPC | CRA balance due rules |
| Business limit | $500,000 × days in the year ÷ 365 if the year is under 51 weeks | ITA 125(5)(b) |
| CCA | Maximum claim × days in the year ÷ 365, with a few exempt classes | T4012 |
| Loss carryforward clock | The short year counts as a full taxation year | ITA 111(1) |
| Close within 7 days after a year end | Election under 249(4)(b) stretches the old year to the acquisition, so no stub year | ITA 249(4)(b) |
The T2 is due six months after the end of each tax year, on the last day of the sixth month for a month end, or the same day of the sixth month otherwise canada.ca. The balance is due two months after year end, or three months for a CCPC that claimed the small business deduction and meets the taxable income test
canada.ca. In a year shorter than 51 weeks the business limit is prorated
laws-lois.justice.gc.ca, and for a year under 365 days CCA is multiplied by the days in the year over 365
canada.ca.
The seven day rule is worth knowing at closing. If the acquisition happens within seven days after a year end, the corporation can elect in its return for that year to have the year end immediately before the acquisition instead laws-lois.justice.gc.ca. The CRA asks for a letter stating the 249(4)(b) election
canada.ca. Instalments for the new year also restart on short year rules: see corporate tax instalments.
How can the short year use up losses that would otherwise expire?
Lossco has a December 31 year end. An unrelated buyer acquires all its shares on June 15, 2026, with no 256(9) election, so control is acquired at the start of June 15 and the deemed year runs January 1 to June 14, 2026: 165 days. Going in, Lossco has a $150,000 net capital loss, $400,000 of non capital losses from its software business, portfolio shares with an ACB of $200,000 worth $120,000, class 8 equipment with UCC of $90,000 worth $50,000, and land with an ACB of $300,000 worth $700,000. The software business earned $40,000 before CCA in the short year.
| Step in the short year | Amount |
|---|---|
| Portfolio shares: ACB written down $200,000 to $120,000 (111(4)(c)) | $80,000 capital loss |
| Allowable capital loss at 1/2 | $40,000 |
| Class 8: UCC $90,000 less value $50,000, deemed CCA (111(5.1)) | $40,000 |
| Software income after the deemed CCA: $40,000 less $40,000 | $0 |
| Land designated under 111(4)(e) at $680,000: gain over $300,000 ACB | $380,000 capital gain |
| Taxable capital gain at 1/2 | $190,000 |
| Net taxable capital gain: $190,000 less $40,000 | $150,000 |
| Net capital loss deducted | $150,000 |
| Taxable income for the short year | $0 |
| T2 due (same day, sixth month) | December 14, 2026 |
| Business limit if needed: $500,000 × 165 ÷ 365 | $226,027 |
Without the designation, the $150,000 net capital loss and the new $40,000 allowable capital loss would both be dead after June 14 laws-lois.justice.gc.ca. The designated amount of $680,000 sits between the $300,000 ACB and the $700,000 value, so it sets the deemed proceeds, and Lossco is deemed to reacquire the land at $680,000
laws-lois.justice.gc.ca. The gain is taxed at the one half inclusion rate in section 38
laws-lois.justice.gc.ca, the two thirds proposal having been cancelled (see capital gains inclusion rate 2026). The buyer gets $380,000 of extra land cost for free.
Two limits on the designation. Property already written down under 111(4)(c), and depreciable classes caught by 111(5.1), can't be designated. And it's made in the short year's return, or on a prescribed form within 90 days of the notice of assessment for that year laws-lois.justice.gc.ca. The $400,000 of business losses carries on under the same business test below, tracked on Schedule 4
canada.ca.
Which losses and credits survive the change?
Business losses survive on conditions. Under 111(5)(a), a non capital or farm loss from a year before the change is deductible after it only if the loss business is carried on for profit or with a reasonable expectation of profit throughout the later year, and only against income from that business or another business earning substantially all its income from similar properties or services laws-lois.justice.gc.ca. Property losses don't survive. The full carryforward mechanics are on non capital loss carryover, and the expired capital side on net capital loss carryover.
Investment tax credits follow the same logic. Under 127(9.1), ITCs from property acquired or expenditures made before the change are cut back unless they're supported by tax on income from the same business, or from a business earning substantially all its income from similar properties or services, and 127(9.2) applies the mirror rule to credits from after the change used in an earlier year laws-lois.justice.gc.ca. The SR&ED pool gets a parallel limit: 37(1)(h) and 37(6.1) cap the pool built before the change at income from that business
laws-lois.justice.gc.ca. If your client's value is mostly unclaimed SR&ED, see SR&ED tax credit 2026.
Section 13(24) stops a loss company from buying depreciable property just before a sale so the new owner can deduct the CCA. Property bought in the 12 months before the change is treated as acquired immediately after it for UCC and ITC purposes, unless an affiliated person held it from before that 12 months or it's used in a business carried on before then laws-lois.justice.gc.ca.
One more brake: under 111(5.5)(b), if the main reason for the acquisition is to trigger 111(4)(d), 111(5.1) or 111(5.3), that writedown doesn't apply, and neither does the 111(4)(e) designation laws-lois.justice.gc.ca.
Sources
Is buying the shares from my client's brother an acquisition of control?
No. Section 256(7)(a) says control isn't acquired solely because shares are bought by or from a related person laws-lois.justice.gc.ca. Brothers and sisters are related by blood under 251(2)(a) and 251(6)(a)
laws-lois.justice.gc.ca. The CRA says there's no deemed year end in that case
canada.ca.
Can the corporation keep its old year end after the acquisition?
Yes, if it wants. The new year starts when control is acquired, and the CRA lets the corporation choose any year end within the next 53 weeks, which can be the old date canada.ca. Section 249(4)(a) deems it not to have established a fiscal period before the change, so the choice is fresh
laws-lois.justice.gc.ca.
Where does the short year show on the T2?
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.