Avoiding the Double Year-End Where a Sale Causes Loss of CCPC Status
During a sales transaction in which a CCPC becomes a non-CCPC, the loss
of CCPC status may occur in advance of closing when a letter of intent
(LOI), a securities purchase agreement (SPA), or another similar
document is signed. The loss of CCPC status results in a deemed year-end
under subsection 249(3.1). This occurs separately from the deemed
year-end on acquisition of control under subsection 249(4), creating two
deemed year-ends for a single transaction. While the deemed year-end on
acquisition of control is unavoidable, the deemed year-end on the loss
of CCPC status can be eliminated by electing under subsection 89(11).
Although this election produces its own workload, it is much less
burdensome than the subsection 249(3.1) deemed year-end.
For the purposes of the CCPC definition, paragraph 251(5)(b) gives
deemed control to shares or voting rights owned by a person (in this
case, a non-resident or non-private person) that has a right under
contract to acquire them. In technical interpretation 2014-0552711E5
(July 7, 2015), the CRA noted the following conditions for a contract to
trigger the application of this paragraph:
- the contract must contemplate the right to acquire the shares or voting rights;
- the right can be absolute or contingent, and can be exercised immediately or in the future; and
- the contract must include two or more persons.
Given this broad interpretation, an LOI or SPA often satisfies the
conditions of paragraph 251(5)(b). In that case, the loss of CCPC status
occurs immediately upon the signing of the contract, even if the
closing is in the future and contingent.
In addition to the normal impact of an additional deemed year-end—most notably the acceleration of loss carryforwards, foreign tax credits, and ITCs—a loss of CCPC status results in loss of ABIL and the SBD, lower ITC rates for SR & ED claims, and the potential creation of a low-rate income pool (LRIP). (Fortunately, one does not immediately lose access to the lifetime capital gains exemption in this specific circumstance—see paragraph 110.6(14)(b).) While these consequences would occur anyway once the deal closed, the timing of these impacts may surprise practitioners and cause unintended or unexpected results.
A subsection 89(11) election deems the entity not to be a CCPC at any
time during or after the taxation year in which the election is made,
which means that the entity is considered a non-CCPC starting on the
first day of the taxation year in which the election is made. With an
election in place, an entity cannot lose its CCPC status under
subsection 249(3.1) through an LOI, SPA, or similar document since it is
already a non-CCPC prior to anything being signed. The subsection
249(3.1) year-end does not occur. The CRA confirmed this point in
technical interpretation 2014-0523171E 5 (March 27, 2014).
While the subsection 89(11) election does not completely avoid the
consequences of losing CCPC status, it accomplishes two things. First,
it prevents the deemed year-end under subsection 249(3.1) that can cause
a large administrative burden. Second, it usually ensures that accurate
accounting information is available for the computations required when
transitioning from a CCPC to a non-CCPC. Because the subsection 249(3.1)
year-end occurs at an unusual time, and often involves little notice,
it would be rare for a year-end of that type to allow proper cutoff work
to be completed in order to produce a fully accurate measurement of
To illustrate the different dates in the process, suppose a
calendar-year corporation signs a contract of sale on February 1, 2021
and the deal closes on April 1, 2021. There is a deemed year-end under
subsection 249(4) on March 30, 2021. The subsection 89(11) election is
made for the short taxation year of January 1, 2021 to March 30, 2021,
and it deems the corporation to have ceased to be a CCPC at the
beginning of that year. The signing of the contract of sale on
February 1, 2021 does not trigger a year-end under subsection 249(3.1),
since the corporation is already a non-CCPC at that time. The
acquisition-of-control return and the subsection 89(11) election are
both due six months after the end of the short taxation year, which is
September 30, 2021.
An anomaly produced by the rules is that a loss-of-CCPC-status return is
technically required until the subsection 89(11) election is filed.
Thus, in the example, that return is due on July 30, 2021 and would be
considered late during the interim period.
BluEarth Renewables Inc., Calgary