An acquisition or change of control (“AOC”) triggers a number of tax related events. In order to determine whether there has been a change of control, we have to understand “control” for tax purposes.
Concept of Control:
Section 256 covers the association rules and determines whether one corporation is associated with another. In order to see if corporations are associated you must also be able to determine control. Control in this section includes both types of control: de facto control as outlined in subsection 256(5.1) and de jure control which has been defined by case law.
De Jure control test was established in a 1964 court case (Buckerfield’s) and then more recently in 1983 (Duha Printers) where the court laid out specific criteria. In addition to working through who owns the shares and controls the votes and ability to wind up corporation, indirect control must also be considered. Indirect control may arise when there is one large shareholder with the remaining ownership being split amongst a great number of shareholders. There may also be special provisions to include, as in giving one shareholder additional vote casting powers or veto powers.
De Facto control is de jure control plus the ability to control by influence over the corporation. This must be assessed on a situation basis as it can take many forms. It is even possible to have de facto control even without owning any shares of the corporation. A fairly comprehensive list (but certainly not exhaustive) is available .
Acquisition of control:
An acquisition of control is deemed to occur at the beginning of the day 12:01 am unless the corporation elects under subsection 256(9). If the election is made, the time the control is changed will follow commercial law principles.
When there has been an acquisition of control several tax events get triggered, most notably the requirement to file a stub period tax return with its correspondingly shorter tax year end. On a change of control, capital losses are not available after the acquisition date. Non-capital losses can be applied going forward against the “same or similar business” as continued by the corporation after the acquisition. Post acquisition of control non-capital losses may also be carried back but again only against a “same or similar business”.
If the corporation ceases to be a CCPC on the acquisition, further rules apply under paragraph 249(3.1). The impacts to consider are the GRIP/LRIP calculation immediately before acquisition (deemed year end) may block payment of eligible dividends until the LRIP is cleared out.
Cost of acquisition:
The costs of an acquisition or reorganization generally fall into one of three buckets as shown below:
|Deductible against income||Class 14.1||Add to ACB|
|Costs of shareholder circular prepared outlining directors’ position and is required by securities regulation||Costs related to establishing a plan to achieve tax efficient results for transaction||Costs related to implementing an expansion of the business|
|Success fees paid to advisors||Costs incurred for an expansion plan not assignable to specific assets||Investment banking fee paid to issue shares|
|Costs of defending hostile takeover bids||Costs for broken deals may be included if acquirer can show that it would have absorbed the target into its existing and similar business||Costs related to putting a defence against take over in place|