Who this is for
- Owners selling the shares of a Canadian corporation
- Buyers and investors taking control of one
- Bookkeepers closing the books at a change of control
Not covered here
- Tax on the sale itself, shares versus assets, and the lifetime capital gains exemption
- Foreign investors ending CCPC status in a funding round
- Choosing a regular year-end and the GST/HST year
- Quebec and Alberta corporate returns in detail
Does a change of control create a deemed year-end?
Yes, if the change is an acquisition of control as the Act defines it (a change of control). When a person or group of persons acquires control of a corporation, the corporation's tax year is deemed to end immediately before that time, and a new tax year starts at it (Income Tax Act, subsection 249(4)). The Act calls the trigger a loss restriction event; for a corporation it means control acquired by a person or group of persons. The corporation is also treated as having no established fiscal period, so the new year-end is a fresh choice.
Three things follow: usually an extra T2 for the short year, a cut-off in the books at that moment, and limits on how old losses and some property values are used afterward.
This applies when someone buys or subscribes for the shares. Buying a business's assets or client book does not end the seller corporation's tax year. After a share purchase the corporation keeps its tax history, so the short-year return and any tax on it stay with the corporation, now under the buyer's control. If the corporation only became or stopped being a Canadian-controlled private corporation (CCPC), with no change of control, a different rule applies (subsection 249(3.1), below).
The case is not simple if:
- the closing falls near the regular year-end, where two elections (the seven-day extension and the actual closing time) are made in the T2 for the year before control, so they are decided before that return is filed;
- the closing has already happened and the short-year T2 or its books are not done;
- control passes to a group, or through a share exchange or amalgamation;
- the shares sold are in a holding company that owns the operating corporation;
- the corporation has unused losses, unpaid bonuses or a shareholder loan;
- the corporation files in Quebec or Alberta, which run their own corporate tax.
Gather before the closing:
- the closing date, and the time of day if it may matter;
- the purchase agreement: closing date, closing-statement date, and who pays accrued bonuses and loans;
- the share register before and after, with any shareholder or voting agreement, options or convertible notes;
- the last filed T2 and its loss schedule;
- bank, card and loan statements, receivable and payable lists, inventory counts and payroll records up to the closing date;
- a list of unpaid bonuses, wages and vacation pay.
What counts as acquiring control, and what does not?
Control is generally the ability to elect a majority of the board, so who holds the votes, and under which share classes and agreements, decides the answer.
- Voting control. The Act does not define "control" here. The CRA's archived bulletin on losses after an acquisition of control ties it to the right to a majority of the votes in electing the board (IT-302R3). That usually takes more than half of the voting shares, which can build up over more than one purchase. Buying existing shares or subscribing for new ones can both do it. Buying in through new shares or a partial buyout is covered in adding or removing an owner.
- Groups. A group can acquire control together, for example when its members agree to vote their shares jointly or act in concert. The same bulletin says this is always a question of fact.
- Indirect control. Control passes through a parent: whoever acquires control of a holding corporation also acquires control of the corporations it controls (subsection 256(6.1)). Selling the shares of a holding company can therefore give the operating company a deemed year-end too, and each such corporation files its own short-year T2.
- Options and similar rights. Rights to acquire shares, such as options, warrants or convertible notes, can be treated as already exercised when a main purpose of getting them is to avoid the loss limits (subsection 256(8)).
- Not an acquisition. Among other cases, subsection 256(7) treats control as not acquired solely because shares are acquired from a person the buyer was related to just before (a parent and child, for example), by a person already related to the corporation, by an estate on a death, or from an estate by someone related to the deceased. These exceptions ignore a relationship that exists only because of a right to buy shares, so options and convertibles need a professional read. "Related" is defined in section 251.
- Deemed acquisitions. An amalgamation or a share exchange can be deemed an acquisition of control even though no one buys shares (subsection 256(7)).
- Asset sales. Buying a business's assets rather than its shares does not take control of the seller. See selling your business for share versus asset sales.
Is a tax year-end under subsection 249(3.1) the same deemed year-end?
No. Subsection 249(3.1) ends the tax year when a corporation becomes or stops being a Canadian-controlled private corporation (CCPC) for a reason other than an acquisition of control. If an acquisition of control causes the change, subsection 249(4) applies instead (Income Tax Act, section 249).
| Acquisition of control, 249(4) | CCPC status change, 249(3.1) | |
|---|---|---|
| Trigger | A person or group acquires control | The corporation becomes or stops being a CCPC, with no acquisition of control |
| Moment of the change | The start of the closing day, unless the corporation elects the actual time (256(9)) | The actual moment; the start-of-day rule does not apply to the CCPC test |
| T2 page 1 | Lines 063 and 065 | Line 066 |
| Letter election when the change falls within seven days after a year-end | Paragraph 249(4)(b) | Paragraph 249(3.1)(c) |
| Loss and property restrictions | Yes | No. If control was also acquired, 249(4) applies instead, with its restrictions |
The line numbers are from the T2 guide; the start-of-day rule is subsection 256(9). A funding round that puts non-residents in control of a startup can end CCPC status and also be an acquisition of control. If it is both, 249(4) governs; see losing CCPC status to foreign investors for which applies.
When does the old year end, and is the closing day in it?
By default the old year ends at the end of the day before the closing day, so the closing day belongs to the new year. Subsection 256(9) treats control acquired at a particular time on a day as acquired at the beginning of that day, and the year ends immediately before that moment.
The corporation can elect out of that rule by including a note with its return for the year that ends immediately before control, and entering the hours and minutes on line 065 of the T2 (T2 guide, lines 063 and 065). The old year then ends immediately before the actual time, so the hours of the closing day before it stay in the old year and the books need a cut-off inside that day. Under the default the cut-off is a date; under the election it is a date and time.
My normal year-end is days before the closing: can I avoid an extra short year?
Sometimes. If the corporation's regular year ended within the 7 days before control was acquired, it can elect to end that year immediately before the acquisition, so the days in between do not become a separate short year (paragraph 249(4)(b); T2 guide).
- The election is made in the T2 for that year, with a letter citing paragraph 249(4)(b), so decide before that return is filed.
- It is not available if another loss restriction event happened within the same period.
- The T2 for the extended year is due six months after the extended end.
- The days are counted back from the control time, which is the start of the closing day unless the corporation elected the actual time. When the closing sits at the edge of the window, count the days with the person preparing the return.
What extra T2 do I file, and when is it due?
The corporation files a T2 for the short year that ends immediately before control passes, due six months after that year-end (CRA: when to file). If control is acquired on the first day of the corporation's regular tax year, the deemed year-end is its regular year-end and no extra short year arises; the loss and property rules still apply. Check with the preparer before electing the actual time on such a day. If the year ends on the last day of a month, the due date is the last day of the sixth month after; otherwise it is the same day of the sixth month. A due date on a weekend or CRA-recognized holiday moves to the next business day. On page 1, answer yes at line 063 and enter the acquisition date at line 065.
The short-year return needs the same care as a full year:
- Statements. The short year needs its own statements and GIFI; see year-end financial statements.
- Losses and designations. The T2 guide sends the loss rules after an acquisition of control to Schedule 4 and lines 063 and 065, and capital property designations go on Schedule 6 (T2 guide, Chapter 3).
- Prorated claims. A tax year of fewer than 365 days generally prorates capital cost allowance by the days in the year over 365 (same guide, Schedule 8). The small business deduction business limit, $500,000 for a corporation not associated with another, is prorated for a year shorter than 51 weeks (T2 guide, Chapter 4). From the control time the corporation may be associated with other corporations the buyer controls (subsection 256(1)), and associated CCPCs share one business limit (subsection 125(3)). If the short year and the next year both end in the same calendar year and the corporation is associated with another CCPC in both, the later year's limit is capped at the lesser of the two years' limits (subsection 125(5)). A non-resident or public-company buyer can end CCPC status altogether; see losing CCPC status to foreign investors.
Tax for the short year is due before the return: 2 months after the year-end for most corporations, or 3 months for a CCPC that meets the CRA's conditions (CRA: due dates). Due dates and late-filing penalties work as for any T2; see the year-end close checklist. After closing the corporation, under the buyer's control, files this return, so the seller-era records need to reach whoever prepares it.
What year-end does the new year take, and do I need CRA approval?
The new year starts at the control time and can end on any date within 53 weeks, with no CRA approval (T2 guide, lines 063 and 065; Income Tax Act, subsection 249.1(1)). The date chosen becomes the corporation's year-end, and the first T2 of the new year is due six months after it.
The right date depends on the new owner's reporting calendar and the length of the first new year. A date that leaves the first new year short means another short-year return: keeping a December year-end after a June closing makes the first new year about six months long.
After that, a change of year-end needs the CRA's approval unless the Act itself ends the year (CRA: determining the tax year). See choosing or changing a year-end, which also covers the GST/HST year.
What books do I need at the control date?
The books need a hard cut-off at the moment the old year ends and a clean opening position for the new year. The short year must stand on its own: a balance sheet at the cut-off and an income statement from the first day of the old year to it.
- Fix the cut-off. The end of the day before the closing day, or the actual time if the corporation elected it.
- Reconcile to the cut-off date, not month-end. Every bank, card and loan account, using the balance on that day.
- Cut off sales and purchases. Record income earned and costs incurred up to the cut-off, and accrue unbilled work, unpaid bills, interest, wages, vacation pay and bonuses. See cash or accrual accounting.
- List what is open at the cut-off. Receivables, payables, inventory counts and prepaid items.
- Fix related-party balances. The shareholder loan and any amounts due to or from the sellers. See the shareholder loan account.
- Book amortization for the short period. The T2 prorates capital cost allowance separately; see amortization and CCA in corporate books.
- Prepare the short-year statements and GIFI, then carry the closing balances into the new year as its opening balances.
A sale agreement may set its own closing-statement date and method. The tax year-end follows the Act, not the agreement, so any difference between the two needs to be reconciled and documented. The general closing steps are in the year-end close checklist.
Do unpaid bonuses and salaries accrued at the deemed year-end still deduct?
They deduct in the short year only if they are paid within 180 days after the end of that year; an amount still unpaid then deducts in the year it is paid instead. Personal services business income is stricter: pay to an incorporated employee deducts only if paid in the year itself (paragraph 18(1)(p)). Under subsection 78(4), salary, wages or other remuneration for an office or employment that is still unpaid on the 180th day after the end of the tax year is deemed not incurred in that year, and incurred in the year it is paid. Reasonable vacation or holiday pay is outside this rule.
The count starts at the deemed year-end, not the regular one. After closing, the buyer controls when the corporation pays. A sale agreement often states who pays an accrued bonus and by when; the accrual is booked in the short year either way. The general bonus rule is in bonus down to the small business limit.
What happens to losses and capital property at the control change?
Old losses become restricted from the control time, and some property is revalued in the short year. The short year ends before the change, so the loss limits bite on later years, while the property adjustments land in the short year. Under section 111:
| Item | Effect of the change of control |
|---|---|
| Net capital losses from earlier years | Cannot be deducted in later years (111(4)(a)) |
| Non-capital and farm losses from earlier years | Only the part that came from carrying on a business survives. It is deductible later only against income from that business, or another whose income is substantially all from similar properties or services, and only if the business is carried on for profit or with a reasonable expectation of profit throughout the year (111(5)(a)) |
| Losses of the new years carried back to earlier years | Net capital losses cannot be carried back across the change (111(4)(b)). Non-capital and farm losses only the business-loss part, against income from that business or a similar one, and only if it was carried on for profit or with a reasonable expectation of profit throughout the loss year and the earlier year (111(5)(b)) |
| Capital property worth less than its tax cost (not depreciable) | Cost written down to value, with the loss recognized in the short year (111(4)(c), (d)) |
| Depreciable property class whose remaining tax value (undepreciated capital cost) exceeds the total value of its property | The excess over the class's total market value, less capital cost allowance otherwise allowed for the short year, is deducted in the short year (111(5.1)) |
| Doubtful-debt allowance | None is allowed; the amount it would have covered is deducted as a bad debt in the short year instead (111(5.3)) |
| Depreciable property bought in the 12 months before the change | If it was not used or acquired for use in a business the corporation already carried on before that 12-month period, and was not held by it or an affiliated person throughout the period before the purchase, it is treated as acquired after the change, for capital cost allowance and credits (13(24)) |
| Unclaimed SR&ED pool | Deductible after the change only against income of the business it relates to, or a similar one, and only if that business is carried on for profit or with a reasonable expectation of profit throughout the year (37(1)(h), (6.1)) |
| Unused investment tax credits | Limited to the tax on income from the business that earned them, or a similar one (127(9.1), (9.2)) |
| Capital property worth more than its tax cost | The corporation may designate it, in the short-year return or on a prescribed form within 90 days after the notice of assessment or notice that no tax is payable for that year, to treat it as sold and reacquired at an amount between its cost and its value. The choice has tax consequences either way (111(4)(e)) |
These rules turn on the loss schedules, the business that continues, any SR&ED or credit carryforwards and what the assets are worth, and a designation has a fixed window, so the numbers need professional review before the closing. The wider loss rules are in business losses.
Does the province change the filing?
In every province and territory except Quebec and Alberta, the CRA administers corporation tax, so the federal short-year T2 also carries the provincial tax (CRA: provincial and territorial corporation tax).
Quebec and Alberta run their own. Unless exempt, a corporation that had a permanent establishment in Alberta during the taxation year files the Alberta return (AT1), due within six months after the end of the taxation year (Alberta: corporate income tax; Alberta Corporate Tax Act, section 36(1)). A corporation required to file a Quebec return (CO-17), generally one with an establishment in Quebec, files it with Revenu Québec even if no tax is payable, within six months after the year-end, under Quebec's own rules. Confirm how each treats the short year before the federal T2 is filed.
Example
These examples are illustrative. Amounts are in Canadian dollars.
Shares sold on June 30, December 31 year-end
An Ontario corporation has a December 31 year-end. Its shares are sold on June 30, and the corporation does not elect the actual time.
- Control is deemed acquired at the start of June 30, so the old year ends June 29. The short-year T2 covers January 1 to June 29 and is due December 29.
- The new year starts June 30. If the buyer keeps December 31, the next return covers June 30 to December 31, 185 days, due the following June 30.
- A C$30,000 bonus accrued at June 29 and still unpaid on December 26, the 180th day, is deducted in the year it is paid, not in the short year. This assumes it is not personal services business pay.
Shares sold four days after a June 30 year-end
A corporation has a June 30 year-end and its shares are sold on July 4. Control is deemed acquired at the start of July 4, and the regular year ended within seven days before it.
- Without an election, the corporation files the T2 for the year ended June 30, due December 31, and a second T2 for July 1 to July 3, due January 3.
- With the election in the June 30 T2, one return covers the year from the previous July 1 to July 3, due January 3. The new year starts July 4.
Losses meet an 80 percent buyer
A corporation has C$400,000 of non-capital losses from a software-support business. A buyer acquires 80 percent of the voting shares. Assuming all shares vote equally and no agreement shifts the votes, that is enough to elect the board, so control is acquired.
- The losses from before the change can offset only income from the support business, or a similar one, and only in years when that business is carried on for profit or with a reasonable expectation of profit.
- If the buyer closes that business and moves in an unrelated one, the C$400,000 cannot shelter the unrelated income.
- The short year before closing is not restricted: its own profit can still use the losses.
Different for you?
- Control is about to change hands, or just did: the cut-off date, the seven-day election, the short-year books and the extra T2 are settled together. Get corporate tax help before the closing.
- The closing is past and the short-year T2 or its books are not done, or the books cannot be reconciled to the cut-off date: see catching up on overdue books, and bookkeeping help for the stub-period set.
- A foreign investor is buying in: CCPC status can end too, and the acquisition-of-control rule governs when both happen. See losing CCPC status to foreign investors and tax clean-up before a raise.
- You want the tax on the sale itself: see selling your business.
- New shares or a partial buy-in: see adding or removing an owner.
- You are buying assets or a business, not shares: see buying an existing business.
- The seller is owed a shareholder loan: see transferring a shareholder loan to a new owner.
- A dividend is planned around the closing: see dividend before or after year-end.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| Control acquisition year-end election window An established corporate tax year-end within this period before a loss restriction event can be extended to the event time by an election on that year's return, subject to subsection 249(4)(b) | 7 days | Income Tax Act: paragraph 249(4)(b) Checked |
| T2 return filing deadline From the end of each corporation tax year, including a deemed short year | Six months | CRA: When to file your corporation income tax return Checked |
| Federal small business deduction business limit Maximum for a CCPC not associated with another corporation; shared among associated corporations and reduced for taxable capital over $10 million or passive income over $50,000; prorated for tax years under 51 weeks; not indexed | $500,000 | CRA: T2 Corporation Income Tax Guide 2025, Chapter 4 Checked |
| Tax-year length below which the small business deduction business limit is prorated A corporation with a tax year shorter than this prorates the business limit by the days in the year over 365 | 51 weeks | CRA: T2 Corporation Income Tax Guide, Chapter 4, line 410 Checked |
| General corporate tax balance due date After the corporate tax year-end, for most income tax balances | 2 months | CRA: Due dates for corporate income tax payments Checked |
| Eligible CCPC tax balance due date After the corporate tax year-end, if the CRA's CCPC conditions are met | 3 months | CRA: Due dates for corporate income tax payments Checked |
| Maximum length of a corporation's fiscal period A corporation's fiscal period cannot end more than this long after it began; after an acquisition of control the new year can end on any date within this limit without CRA approval | 53 weeks | Income Tax Act, paragraph 249.1(1)(a) Checked |
| Days after the tax year-end by which accrued salary, wages or bonus must be paid to be deducted in that year Salary, wages or other remuneration for an office or employment, other than reasonable vacation or holiday pay or a deferred amount under a salary deferral arrangement; counted from the last day of the tax year, which after an acquisition of control is the deemed year-end | 180 days | Income Tax Act, subsection 78(4) Checked |
| Acquisition-of-control capital property designation deadline Alternative to designating eligible property in the return for the tax year ending immediately before the loss restriction event; period starts when the assessment or no-tax notification is sent | 90 days | Income Tax Act, paragraph 111(4)(e) Checked |
| Alberta corporate return filing period After the taxation year end under Alberta Corporate Tax Act subsection 36(1); statutory filing exceptions apply. | Six months | Alberta corporate return filing period Checked |
| Quebec corporate return filing period After the taxation year end; Revenu Québec CO-17.G, section 3.5.2. | Six months | Quebec corporate return filing period Checked |
Primary sources
- CRA: T2 Corporation Income Tax Guide, Chapter 1 (lines 060 to 066)
- Income Tax Act, section 249 (taxation year)
- Income Tax Act, section 249.1 (fiscal period)
- Income Tax Act, section 251.2 (loss restriction event)
- Income Tax Act, section 256 (acquiring control, start-of-day rule)
- Income Tax Act, section 111 (losses after a loss restriction event)
- Income Tax Act, section 78 (unpaid remuneration)
- Income Tax Act, section 251 (related persons, rights to acquire shares)
- Income Tax Act, section 125 (business limit)
- CRA: Archived IT-302R3, losses of a corporation after an acquisition of control
- CRA: T2 Corporation Income Tax Guide, Chapter 3 (losses, Schedule 4, Schedule 8)
- CRA: T2 Corporation Income Tax Guide, Chapter 4 (business limit)
- CRA: When to file your corporation income tax return
- CRA: Determining your corporation's tax year
- CRA: Due dates for corporate income tax payments
- CRA: Provincial and territorial corporation tax
- Alberta: Corporate income tax
- Alberta Corporate Tax Act, section 36(1)
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.