23 February 2000 External T.I. 1999-0014315 - Deductibility of non-capital losses

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Flow through of non-capital losses after an acquisition of control - wholesale business and retail business of that same product merged.

Position: Question of fact but generally the wholesale business of product A is a same or similar to the retail business of product A.

Reasons: The law.

XXXXXXXXXX 		1999-001431

Attention: XXXXXXXXXX

February 23, 2000

Dear Sirs:

Re: Deductibility of Non-Capital Losses on an Acquisition of Control

This is in reply to your letter dated December 6, 1999, wherein you requested our views on the application of subsection 111(5) of the Income Tax Act (the "Act") where control of a corporation is acquired by another corporation in the circumstances described below.

A corporation ("Profitco") is in the business of selling certain products as a wholesaler in Canada. Another corporation ("Lossco") is in the business of selling the same products as a retailer in Canada. Profitco is one of Lossco's suppliers. Lossco incurred non-capital losses from its retail business. Profitco has acquired all of the issued and outstanding shares of Lossco such that control of Lossco has been acquired for the purposes of the Act. Profitco would like to amalgamate with Lossco pursuant to subsection 87(1) of the Act. The new corporation created by the amalgamation ("Amalco") will continue to operate the businesses carried on by Profitco and Lossco (the "predecessor corporations") for profit or with a reasonable expectation of profit in order that Amalco can utilize Lossco's available non-capital losses.

It is your view that the application of subsections 87(2.1) and 111(5) of the Act will permit the non-capital losses of Lossco to be used to offset any income from Amalco's business from the wholesaling and retailing of its products. In your letter you noted that in a technical interpretation dated January 11, 1990, we had expressed the view in that fact situation that the widget wholesaling business of one corporation would be considered to be a similar business to the widget retailing business carried on by a second corporation for the purposes of subsection 111(5) of the Act. You also referred to similar views on wholesaling and retailing business operations as expressed by the Canada Customs and Revenue Agency ("CCRA") in IT-259R3 at paragraph 20 as additional support.

Based on the above facts you ask whether we would agree that Amalco would be considered as carrying on the same or similar business of each predecessor corporation for the purpose of subsection 111(5) of the Act.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the CCRA's views must be made to your local Tax Services Office. Although we are not able to comment specifically on the situation described in your letter we can offer the following general comments.

It is a question of fact whether a particular business is carried on by a corporation for profit or with a reasonable expectation of profit throughout a particular taxation year and whether that business is the same or similar business to any other business for the purposes of subparagraphs 111(5)(a)(i) and (ii) of the Act. In regard to the subparagraph 111(5)(a)(i) requirement that the business giving rise to the losses must be carried on in each loss application year in order for the losses to be deductible it is our view that the business activities of the loss business must continue to be significant otherwise we would have to consider whether that same business was still being carried on for profit or a reasonable expectation of profit.

Using your example for illustrative purposes and assuming the retail business of Lossco continues to be carried on for profit or with a reasonable expectation of profit in a particular year, we are of the view that the wholesale business of Profitco would be considered a business "substantially all the income of which was derived from the sale...of similar properties..." to those sold by the retail business of Lossco for the purposes of subparagraph 111(5)(a)(ii) of the Act.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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