Sharing Losses Incurred by Related Companies

By Victoria E. Turnbull

Sharing Losses Incurred by Related Companies

Are sharing losses allowed to offset the income generated by a related company?
Yes, it is possible for related companies to be sharing losses; however some technical issues may arise when trying to share tax losses between these companies. This is due to the fact that consolidated tax returns are not permitted to be filed in Canada. Tax returns for corporations in Canada are filed on a ‘separate entity’ basis, which could provide some technical challenges for tax planning in this regard. However if certain requirements are met, sharing losses of tax between related corporations is possible.

Get a Conversation Started With Our Experts About Sharing Losses!

What are the common strategies used then?
One strategy that is used in tax planning is to wind-up the loss company into the profit company. Under Canadian tax law this would allow the loss company to be able to transfer its loss to the profit company to offset its income or gains in the tax year of the wind-up. One stipulation is that these losses cannot be carried back and can only be carried forward against the income or gains of the profit company. In addition the profit company must own 90% or more of the shares of the loss company to apply this rule.

Are there any other strategies that can be used?
Another option that could be used is for the profit company to sell some of its business or income-producing assets to the loss company, which would allow the loss company to use the income to offset against the accumulated losses, and would also reduce the income of the profit company, resulting in less tax altogether. One way in which the loss company could purchase the assets would be to issue shares to the profit company or issuing interest free debt.

Final Wrap-Up
On a general level it may be a very difficult process to sharing losses between related companies. However under certain circumstances and the use of advanced tax planning it may be possible to do so. It is always important to review with your accountant the technical requirements established by CRA to avoid any potential pitfalls.

Check out the CRAs Archived article regarding transfer of property to a corporation.

Disclaimer:
THIS ARTICLE deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other
appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or
organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of
liability for its contents or for any consequences arising from its use.