Canada: Using Tax Losses Within A Corporate Group

Last Updated: March 9 2012
Article by Steve Suarez

Most Read Contributor in Canada, November 2017

In difficult economic times, businesses need to make the best use possible of their resources. This includes any tax attributes available to them to offset taxable income or gains they may have. This BLG Bulletin discusses some of the planning opportunities that a Canadian corporation may have for using tax losses of a related Canadian corporation. Such planning is especially important in Canada, because the Income Tax Act (Canada) (ITA) does not contain rules for group relief that simply consolidate one corporation's losses against income of a related corporation.


Canadian tax law distinguishes between capital losses and non-capital losses. Non-capital losses arise from operating a business or an investment property (i.e., the tax version of an operating loss). A non-capital loss represents the excess of allowable expenses over revenues for the year, as calculated under the ITA. Generally, the non-capital loss for a year can be applied against any income from other sources (including capital gains) realized by the taxpayer in the same year, the three preceding taxation years or the 20 following taxation years.

A capital loss arises from a disposition of capital property, when the taxpayer's cost of the property plus any sale expenses exceed the sale proceeds. A capital loss realized in a year may be deducted against any capital gains realized in that year, the three preceding taxation years or any later taxation year. Capital losses may only be deducted against capital gains.1

Accrued losses on a capital property are generally realized only where there has been a disposition of the property (i.e., a sale or other transfer). As a general rule, the ITA denies or suspends recognition of capital losses on transfers of property between related parties, or where the taxpayer (or a related party) acquires an identical property within 30 days before or after the time the loss property is disposed of. The principle is that losses should only be recognized for tax purposes where there is a disposition of the relevant property outside of the corporate group. Loss denial rules also apply to certain specific property, such as shares on which the taxpayer has received certain tax-advantaged dividends or loans not made for the purpose of earning income.


In general terms, the Canada Revenue Agency (CRA) considers tax planning to use losses between related parties to be acceptable, while planning to allow one taxpayer to use the losses of an unrelated taxpayer is viewed as contrary to the scheme of the ITA and impermissible. This reasoning is based on the existence of various rules in the ITA that allow losses to be used in some circumstances and not others, and on the restrictions on losses that apply to a corporation that undergoes an acquisition of control.2

This means that there are significant opportunities for two or more related Canadian corporations3 to maximize the use of losses within the group. In 2010 the federal government announced its intention to study the idea of introducing a loss transfer system or consolidated filing procedure for corporate groups (such as exists in the U.S. and many other countries), whereby entities within a related group can simply use one another's losses without having to take any steps to actually shift income or gains from one corporation to another.4 However, historically such proposals have gone nowhere (a previous initiative in the 1980s died) and it is uncertain at best if this attempt will be any different.

There are various ways in which Canadian corporations within a related group can optimize the use of the group's available tax attributes such as losses. While such planning is not per se offensive to the CRA, there are certain aspects of particular strategies that the CRA does object to, and a number of technical tax issues must also be considered to ensure that the desired results are obtained without tripping up. It is useful to review the most common techniques for enabling a Canadian corporation with income or gains (Profitco) to access the accumulated losses of a related Canadian corporation (Lossco), and to understand the limitations and technical issues associated with these strategies.


In some cases the desired results can be achieved by winding up Lossco into Profitco or amalgamating Lossco and Profitco. The loss utilization rules applicable to qualifying wind-ups and amalgamations are depicted in Figure 1.

Normally where a Canadian corporation is wound up, its losses cease to exist. An exception is where one Canadian corporation owns all of the shares of the Canadian corporation that is winding up. In those circumstances, the parent corporation can use the subsidiary's capital and non-capital loss balances going forward, but cannot carry the subsidiary's loss balances back to any pre-wind-up parent taxation year. The parent can of course carry any of its own losses forward or back against its own taxable income, subject to the usual three-year carryback limit. A wind-up of Lossco into Profitco allows Profitco to use Lossco's accumulated losses on a go-forward basis against Profitco's future income or gains.

Canadian corporations can also be amalgamated on a tax-deferred basis, and where they are related, no acquisition of control (and associated loss use restrictions) should occur. The new corporation resulting from the amalgamation (Amalco) can use the loss balances of its predecessors (Profitco and Lossco) going forward, but losses incurred by Amalco cannot be carried back and used in pre-amalgamation periods of its predecessors. The only exception is where one amalgamating corporation owns all the shares of the other: in those circumstances Amalco can carry post-amalgamation losses back against pre-amalgamation income of the parent corporation (but not the subsidiary) subject to the usual three-year carryback limit, i.e., the same result as a wind-up above. An amalgamation of Lossco and Profitco is another way of allowing Lossco's accumulated losses to shelter Amalco's post-amalgamation income from Profitco's assets.


In some cases merging entities or winding them up is undesirable. There are other ways of allowing Lossco's losses to be used against Profitco's income or gains. For example, Profitco can sell a business or income-producing asset to Lossco, such that the income generated by the business or asset is absorbed by Lossco's accumulated losses. Lossco may pay for the business or asset by issuing shares of itself to Profitco (if the transfer needs to be tax-deferred so that Profitco realizes no gain or income) or with non-interest bearing debt (such that Profitco is not being taxed on interest income).

Where there are concerns about exposing Profitco's assets to Lossco's liabilities, Profitco and Lossco may form a partnership. Profitco transfers the business to the partnership on a tax-deferred basis in exchange for an interest in the partnership, and Lossco transfers other valuable consideration (e.g., existing assets, dividends received from a subsidiary, or property received from its shareholder on a share subscription) into the partnership in exchange for a partnership interest. This structure allows a portion of the partnership's income to be allocated to Lossco commensurate to the value of Lossco's contribution to the partnership. While having Lossco realize only part of the business' income is less tax-efficient than having Lossco realize all of such income, in appropriate circumstances this may still be a useful form of planning.


To the extent that Profitco is proposing to sell assets outside the corporate group in a transaction that will produce capital gains or recaptured depreciation for tax purposes, it is usually possible to structure the sale so that the assets are transferred first to Lossco in exchange for Lossco shares on a tax-deferred basis (see Figure 2). The gain assets are then sold by Lossco to the arm's-length third party. This results in the gains or income being realized within Lossco, where they can be sheltered by its losses. The sale proceeds are then typically distributed to Profitco as a dividend, or retained in Lossco and used to generate further taxable income that can be sheltered with losses.


To the extent that Lossco has valuable assets that are not generating significant taxable income (e.g., shares of a subsidiary), these can be sold to Profitco in exchange for interest-bearing debt. So long as Profitco is acquiring the property for the purpose of gaining or producing income (which may not necessarily be immediate income) and the rate of interest is commercially reasonable, interest on the debt should be deductible to Profitco, and Lossco can absorb the interest income with its losses.


There may be opportunities in some cases for Lossco to provide services or property to other members within the corporate group. For example, Lossco may have (or can acquire) property that could be leased or licensed to other members of the corporate group for bona fide use in their businesses (e.g., real estate or IP), or the necessary personnel can be hired by Lossco to provide management, finance or other services to group members. Commercially reasonable fees for services or property should be deductible expenses for the other group members, and Lossco's losses offset the fee income.


Where Lossco has external interest-bearing debt, Profitco can borrow money from a bank and subscribe for common shares of Lossco. Lossco in turn uses the subscription funds to repay its external debt. If there is a reasonable (but not necessarily immediate) prospect of Profitco earning dividends from its new Lossco shares, interest on Profitco's new debt should be deductible to it, and the refinancing effectively shifts Lossco's interest expense deductions to Profitco.


A somewhat more complex form of loss consolidation planning involves generating interest expense deductions in Profitco via a circular intra-group subscription for shares of Lossco. This form of planning does not transfer property out of Profitco, but rather leaves the existing income there and creates deductions within Profitco. The key elements of such planning are that generally (1) dividends received by one Canadian corporation from another Canadian corporation are 100% deductible in computing taxable income (i.e., are received tax-free), and (2) interest on debt incurred to purchase shares of a corporation is tax-deductible so long as there is a reasonable prospect of earning dividend income.

In its simplest form (where Profitco owns all the shares of Lossco), this type of loss consolidation is achieved as follows (see Figure 3):

  • Using funds borrowed from a bank under a "daylight loan" (i.e., repaid that day), Profitco subscribes for preferred shares of Lossco that pay dividends at a fixed annual rate;
  • Lossco uses the funds received to make an interest-bearing loan back to Profitco, at a rate of interest that is slightly less than the dividend rate on the Lossco preferred shares, such that Profitco is earning a positive spread on its preferred share investment; and
  • Profitco uses the loan proceeds to repay the daylight loan.

The result is that Profitco has incurred debt to acquire shares; the debt satisfies the interest-deductibility test of having been incurred for the purpose of producing income, since Profitco earns dividend income on its investment even net of interest expense. Preferred share dividends are received by Profitco on a tax-free basis due to the inter-corporate dividend deduction in subsection 112(1) ITA. Lossco earns interest income, which is absorbed by its losses. Effectively, a portion of Lossco's losses have been shifted to Profitco.

There are other variations of this structure: for example, where Lossco is the parent corporation, it is usually necessary to employ a three-corporation structure in order to meet corporate law requirements (see Figure 4). There are also variations that result in losses being accumulated in a new corporation over a number of years, which is then amalgamated into a Profitco for use in future years. However, the basic technology remains the same: the making of interest-bearing loans to subscribe for dividend-paying shares within a circular intra-group structure.

Numerous technical issues and CRA administrative concerns must be observed in creating and operating these kinds of tax-driven structures. These include the following:5

  • Interest rate: the rate of interest on the Lossco loan to Profitco must be commercially reasonable in the circumstances;
  • Borrowing capacity: to prevent situations where huge amounts of intra-group debt and preferred shares are created in order to speed up the generation of deductions in Profitco, the CRA limits the amount of interest-deductible debt that may be created in these structures to an amount reflecting the external borrowing capacity of the corporate group;
  • Foreign loss importation: the CRA objects to any structure that amounts to importing losses from outside of Canada into Canada; and
  • Inter-provincial effects: in situations where these structures result in a significant shift of taxes from one province to another due to differences in the inter-provincial income allocation of Profitco and Lossco, the CRA and provincial revenue authorities have raised concerns in the past. Indeed, provincial objections have historically been a major impediment to the creation of a formal loss transfer system.

When using these structures, it is extremely important to consult tax counsel who are very experienced in working with them, as these transactions must be planned, implemented, documented and eventually unwound with precision. Often the facts of a particular case raise unique or unusual concerns or issues, and it is vital to understand the CRA's views on such matters and to plan accordingly. The CRA's policies on various aspects of these loss consolidations have changed over time, and there are a number of subtle issues that are easy to overlook. In appropriate cases, an advance tax ruling from the CRA may be advisable.


Canadian corporations are well-advised to make the best possible use of their tax attributes. For Canadian corporate groups (including groups of Canadian subsidiaries of foreign parent corporations), intra-group loss planning is an essential element of legitimate tax minimization.


1 An exception is a special form of capital loss (an "allowable business investment loss") arising from the disposition of shares or debt of a Canadian-controlled private corporation all or substantially all of whose property is used in an active business carried on in Canada.

2 For example, the Department of Finance Technical Notes to s. 245 ITA (the general anti-avoidance rule) note the following: "Another example involves the transfer of income or deductions within a related group of corporations. ... There are explicit exceptions intended to apply with respect to transactions that would allow losses, deductions or credits earned by one corporation to be claimed by related Canadian corporations. In fact, the scheme of the Act as a whole, and the expressed object and spirit of the corporate loss limitation rules, clearly permit such transactions between related corporations where these transactions are otherwise legally effective and comply with the letter and spirit of these exceptions."

3 E.g., one corporation controls the other, or both are controlled by the same person or group of persons.

4 See the Department of Finance website:

5 These issues were discussed in detail at a presentation by Steve Suarez of BLG and Wayne Adams, Director General (Income Tax Rulings Directorate) of the CRA, entitled "Intra-Group Loss Consolidations – Staying On-Side," at the Toronto Centre CRA & Professionals Consultation Group meeting on October 27, 2009.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions