As the chief financial officer of a biotechnology company, Michael Singer is constantly trying to secure financing for research and development.
So when the capital markets froze up last year, he saw an opportunity - dangle $260-million of tax-loss credits to an income trust looking to convert to a corporation, and ask for $8.5-million in return.
He found a taker in food maker Premium Brands Inc., which agreed to be taken over briefly by Montreal-based Thallion Pharmaceuticals, just long enough to transfer the credits and split the companies up again.
"We saw the window and took advantage," he said.
"We gave up the potential to apply those losses to our future income, but the upside was we injected some capital at a time when capital markets were dead."
That window is now closed. Last Thursday's federal budget restricted the ability of income trusts to shelter themselves from taxes by acquiring tax losses from unrelated companies.
"Aggressive schemes have been designed to use these provisions to achieve inappropriate tax-loss trading that would not be allowed as between two corporations," the government stated.
As many as 12 of the country's approximately 175 income trusts have already done deals to shelter themselves from taxes, but since the new restrictions are immediate, there won't be any more.
"It's a fairly simple way of fixing what was perceived to be a loophole," said Gabrielle Richards, a Toronto-based partner in McCarthy Tétrault LLP's tax group.
Any deals that were already announced will still be allowed to proceed; however, tax experts warn that just because the federal government seems to be willing to grandfather some deals, that doesn't mean the Canada Revenue Agency (CRA) will allow the tax losses to be used to offset profits.
"Those who did deals shouldn't feel 100-per-cent confident since CRA hasn't audited any of those deals yet, so we don't know how it'll be regarded," said Robert Kopstein, a Vancouver-based lawyer at Blake Cassels & Graydon LLP.
"There haven't been any opinions about whether they were 100-per-cent slam dunks, but they are probably still relatively pleased they were able to do the deals."
The companies taking advantage of the tax-loss strategy included Superior Plus Income Fund, Total Energy Services Trust and Algonquin Power Income Fund.
They all partnered with biotechnology companies, because the industry accrues massive credits throughout research and development cycles that can take years and cost hundreds of millions of dollars before leading to a commercial product.
"That's just the nature of the industry - it can take a decade to bring something to market so they rack up enormous tax writeoffs that they carry forward," said Peter Brenders, chief executive officer of the Ottawa-based industry association BIOTECanada.
"That said, the companies haven't been lining up to sell those credits. They do want to keep the credits for themselves for when they do become profitable - it was a last resort."