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The current legislative restrictions which are aimed

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The current legislative restrictions which are aimed at curtailing the utilization of taxlosses, are based on certain transactions and events which are deemed to occur when there11,095
482Introduction to Federal Income Taxation in Canadahas been an acquisition of control. These transactions and events, as well as other rules thatcomprise the restrictions, are discussed below. The government policy in implementing theserestrictions appears to be to restrict the tax-shielding benefits of losses where control overthe losses passes to controlling shareholders who did not bear the risks that generated thelosses.11,100Deemed year-endITA: 249(4)The corporation is deemed to have a taxation year-end immediately before the time ofthe acquisition of control of the corporation (referred to hereinafter as the ‘‘deemed taxationyear-end’’). The result is that various adjustments that are normally made at a year-end, areITA: 10; ITR: 1801required to be made before the acquisition of control. For example, the requirement thatinventory be valued at the lower of cost or market at a taxation year-end will cause anyaccrued losses in inventory to be realized. This adjustment will increase the corporation’s pre-acquisition non-capital losses or farm losses. As will be explained later, such pre-acquisitionlosses are available for carryforward, but only after certain restrictive conditions are satisfied.The advent of the deemed year-end causes other adjustments (discussed below) to increasethe corporation’s pre-acquisition of control non-capital losses.ITA: 78(1), 78(4)As a result of the deemed year-end, the corporation is required to satisfy the normalcompliance requirements of filing tax returns, reviewing unpaid amounts, determining thestatus of charitable donations and loss carryovers and their carryforward period, etc.ITA: 13(4), 44(1)However, a short taxation year that may result from an acquisition of control will notadvance the replacement period required to benefit from the rollovers available for an invol-untary or voluntary disposition. These rollovers allow a full 24 months and 12 months after aninvoluntary and voluntary disposition, respectively, from the end of the short taxation year inwhich such a disposition occurs.ITA: 249(4), 249(4)(d)Unless the deemed year-end coincides with the corporation’s normal year-end, the corpo-ration may have two taxation years lasting less than 24 months in total. To illustrate this,assume that a corporation whose normal taxation year-end is December 31, experiences anacquisition of control on April 1, 2014. The corporation will have a deemed year-end ofMarch 31, 2014. If the corporation chooses to return to its original taxation year-end ofDecember 31, the corporation will have two taxation years ending in the 12-month periodending December 31, 2014. The first taxation year will be three months long, the secondnine months long. If the corporation chose a date for its subsequent taxation years to be, say,March 31, as permitted, it would then have two taxation years lasting a total of only15 months — namely, the deemed taxation year ending on March 31, 2014 will be 3 monthslong and the taxation year ending March 31, 2015 will be 12 months long. The foregoingexample can be illustrated with the following diagram:Apr. 1/1Dec. 31/13 mos.

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Term
Spring
Professor
Foerster

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