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 income.

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.

Robert Myroon
BluEarth Renewables Inc., Calgary

Canadian Tax Focus
Volume 11, Number 1, February 2021
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