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Corporate Loss Utilization
Corporate tax losses expire after 7 years, so any technique to utilize losses should be considered.
One such technique is useful when the shareholder owns two corporations. Corporation 1 has tax losses it cannot use and Corporation 2 has taxable income. For legal reasons, perhaps the shareholder does not want to amalgamate the corporations to utilize the tax losses. CRA will permit, if documented and executed correctly, Corporation 1 to borrow money on a short-term basis from the bank, lend at a reasonable interest rate to Corporation 2, then have Corporation 2 purchase shares in Corporation 1 for the amount of the loan. Corporation 1 then takes the proceeds on the share purchase and repays the bank loan, leaving the interest-bearing debt intact. The result is Corporation 1 has interest income it can use to offset it's losses and Corporation 2 has a deduction for the interest paid.
Caution is warranted. Corporation 2 now has share investment in Corporation 1 with a high cost base. Amalgamation after this transaction may mean the high cost base is lost. Additionally, obtaining the tax benefits from the high cost base would necessitate Corporation 2 selling those shares for a high value in the future. Additionally, the documentation has to be complete and interest needs to be paid on a timely basis.
Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice.
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