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Losses disallowed on sale to related parties

Have you considered disposing of an asset to a related party? The Income Tax Act contains many rules which prevent taxpayers from realizing certain losses. These rules are collectively known as the stop-loss rules.

One of the types of losses is commonly referred to as a suspended loss. Suspended losses may occur when a corporation, partnership or trust disposes of capital property at a loss to an affiliated person. For example, a loss can not be claimed if a corporation disposes of property at a loss to the controlling shareholder, the spouse of the controlling shareholder, or another corporation controlled by the controlling shareholder or their spouse. Similarly, a partnership can not claim a loss on a disposition to the majority partner or their spouse, and a trust can not claim a loss on a disposition to the majority interest beneficiary or their spouse. These rules are in place to prevent losses from being claimed in situations where you dispose of an asset but continue to possess control over it.

The loss does not disappear. It is suspended until a future disposition of the asset to an unrelated party. For example, your corporation may own shares of a public company with an accrued loss of $1,000. Your corporation sells these shares to you, the controlling shareholder, at fair market value. If you still own the shares 30 days after the sale, the loss will be suspended. Your corporation will not be allowed to claim the loss until you personally dispose of the shares to an unaffiliated person.

These rules will also apply if you or an affiliated person purchases an identical asset either 30 days before or after the disposition and continues to own the asset at the end of this period. An identical asset must be the same in all material respects, such as shares of a company that have identical rights.

A similar provision applies to capital assets which are disposed for at a terminal loss. For example, you may transfer a building from one corporation that you own to another corporation that you own for proceeds less than its tax cost. Normally, a terminal loss can be claimed for the difference between the proceeds and the tax cost of depreciable property. This terminal loss will be suspended until the second corporation disposes of the property to an unaffiliated person. The first corporation can claim the loss at that time.

Similar rules apply when individuals dispose of property at a loss to an affiliated person. However, the loss is added to the cost base of the affiliated person rather than being suspended and retained by the transferor. We would be happy to advise on these rules separately.

Any disposition to a related party needs to be properly assessed. Many different rules within the Income Tax Act may apply to these transactions with negative tax implications.

For more information, please contact or 1 844-GYTD-CPA Disallowed on Sale to Related Parties
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