– Target will be required to realize any accrued losses on depreciable and non-depreciable capital assets, inventory and accounts receivable in the taxation year ending on the acquisition of control. – Any carried forward capital losses and non-capital losses from “property sources” (e.g., from making loans or earning interest or dividends not as part of a business) from pre-acquisition of control periods (including any arising due to acquisition of control writedowns) will not survive the acquisition of control. – Pre-acquisition of control non-capital losses from a business (including any arising due to acquisition of control writedowns) may be carried forward on a restricted basis. Following the acquisition of control, such carried forward losses will be deductible if the business giving rise to the loss is carried on with a reasonable expectation of profit throughout the taxation year in which the loss is to be deducted, but only against income only from that business or similar businesses. – Pre-acquisition of control losses can be used to selectively step up the tax cost of target assets, providing an opportunity to use losses that otherwise would not survive the acquisition of control or that would be less useful as a result of acquisition of control restrictions. REPORTING OBLIGATIONS AND ANTI-AVOIDANCE RULES – Mandatory disclosure rules require corporations and other taxpayers and, in certain circumstances, their legal and other advisors to promptly report “reportable” and “notifiable” transactions. > “Reportable transactions” are tax avoidance transactions that have one of the three following “hallmarks” of aggressive tax planning: (i) the fees of the advisor or promoter are based or contingent upon a resulting tax benefit or attributed to the number of participants or those offered an opinion or advice; (ii) the advisor or promoter has “confidential protection” (i.e., participants have a legal obligation not to disclose the transaction to third parties, including the tax authorities); and/or (iii) any person, advisor or promoter receives “contractual protection” (i.e., any direct or indirect form of insurance against the tax risk of the transaction). > “Notifiable transactions” are certain specific transactions identified by the Canadian tax authorities as requiring reporting, such as “back-to-back” payment arrangements that reduce Canadian withholding taxes. – Certain corporations with assets of at least $50 million must also report any uncertain tax positions reflected in their audited financial statements. – Penalties for non-disclosure can be significant and the limitation period of reassessment of taxes will not commence where there has been a failure to report. – Under Canada’s general anti-avoidance rule (GAAR) the Canada Revenue Agency may deny tax benefits if a transaction is considered to misuse or abuse the provisions of the Income Tax Act (which may be indicated by a lack of “economic substance”). Significant penalties (equal to 25% of the additional tax assessed) may be applicable under GAAR.
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Canadian Mergers & Acquisitions
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