Tax loss utilization and corporate groups

The less restriction there is in the tax system on the effective transfer of losses, the higher the price that will be paid to the seller, which will tend toward the limit of its full tax value. [...] In such cases, the deferral of deductions for a loss-carrying corporation tends to increase the marginal tax rate on investment above what it would be in a system of 25 For example, the general relationship requirement in the U. S. for tax consolidation is 80 per cent ownership, and the requirement in the U. K. for tax loss transfer is 75 per cent ownership. [...] The Extent of the Issue The current non-refundable loss system is costly to the taxpayer to the extent that tax loss transfer involves uncertainty and expense, and because of foregone interest on the deferral of the tax refund. [...] According to summary data presented in the Department of Finance’s “The Taxation of Corporate Groups,”30 the stock of unused losses in 2008 was $206 billion, or nearly 100 per cent of corporate taxable income for the same year.31 Assuming a 25 per cent effective tax rate and a five per cent nominal rate of interest, the cost of carrying this stock for a single year is on the order of “only” $5 bil [...] The foregoing discussion of the treatment of corporate tax losses in the Canadian corporate tax system suggests that the current system raises issues of horizontal equity and economic efficiency, including the issue of loss utilization within corporate groups.