The Hidden Risk in Buying Companies for Tax Losses
Effective corporate tax planning requires more than technical compliance. It must also reflect real commercial substance and align with the intent of the law.
The decision in Total Energy Services Inc. v. The King (2024 TCC 12) and the Federal Court of Appeal decision in 2025 FCA 77 provide a clear example of this principle. These cases show how aggressive tax loss utilization can fail when the underlying business reality does not support it .
The situation began with the introduction of the SIFT rules. These rules changed how income trusts were taxed. As a result, many trusts, including Total Energy Services Trust, needed to convert into corporations to remain competitive.
To complete this conversion, Total looked for a suitable corporate structure. It selected Biomerge Industries Ltd., which was a restructured version of Xillix Biotechnologies. Xillix had stopped operating its medical imaging business. However, it still carried significant unused tax losses.
At this stage, Nexia Biotechnologies Ltd. played a key role. Nexia invested about $4.4 million to settle the company’s debts and preserve its public listing. At the same time, it structured its ownership to hold a large economic interest while limiting voting control. This approach aimed to preserve access to the tax losses under Section 111(5).
Next, Total implemented a plan of arrangement. Under this plan, trust unitholders exchanged their units for shares in Biomerge. After the transaction, these unitholders owned 99.8 percent of the new corporation. Meanwhile, the original shareholders were mostly bought out and retained only a minimal interest.
Following this, the operating business of Total was merged into the shell company. As a result, the corporation attempted to use the old biotech losses to reduce tax on oil and gas income.
However, the CRA reviewed the full structure and challenged the use of these losses. Both the Tax Court and the Federal Court of Appeal agreed with the CRA and applied the General Anti-Avoidance Rule under Section 245.
The Court’s reasoning followed a clear path.
First, the taxpayer acknowledged that using the losses created a tax benefit. Next, the Court reviewed the purpose of the transaction. The evidence showed that the deal was priced based on cents per dollar of tax losses. Therefore, the Court concluded that accessing these losses was a primary objective.
In addition, the Court examined the overall outcome. The original biotech business had ended. The ownership had almost completely changed. A new and unrelated business replaced the old one.
Because of this, the Court found that the transaction frustrated the purpose of Section 111(5). This rule exists to prevent unrelated parties from acquiring a company mainly to use its losses against income from a different business.
As a result, the Court denied significant tax benefits. These included approximately $26 million in non-capital losses, $23 million in SR&ED expenditures, and other related tax attributes.
This case provides an important lesson for business owners.
Tax losses can be valuable. However, they cannot be separated from the business that created them. When ownership, business activity, and economic reality change, those losses may no longer be available.
Therefore, it is important to focus on substance. Transactions should have clear commercial reasons. Pricing should reflect real business value, not only tax benefits. Most importantly, the structure should align with the purpose of the Income Tax Act.
At Cloudiverse CPAs Inc. in Burnaby, we help businesses plan corporate restructurings, acquisitions, and tax strategies that are practical and defensible. Our approach ensures that tax efficiency is supported by strong documentation and real business purpose.
Planning ahead makes a difference. It helps avoid costly reassessments and ensures that your tax position stands up to CRA review.
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