15 February 2006 External T.I. 2005-0159391E5 - Business Transactions Prior to Incorporation

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.

Principal Issues:

1) Are business activities, incurred before incorporation, considered activities of the corporation?

2) Is there an absolute time limit for business conversions or new business incorporation for the purpose of determining whether expenses incurred prior to incorporation are considered incurred by the corporation?

Position:

1) Question of Fact.

2) No.

Reasons:

1) Conditions for deductibility as set out in IT-454.

2) Provided the delay is not due to any action taken or not taken by the parties involved.

								2005-015939
XXXXXXXXXX 							Luisa A. Majerus, CA
(613) 832-3488
February 15, 2006

Dear XXXXXXXXXX:

Re: Business Transactions Prior to Incorporation

This is in reply to your letter dated November 16, 2005, requesting information on the deductibility of expenses incurred prior to the incorporation of a business. Specifically, in your situation a sole proprietor or partners of a partnership choose to incorporate part way through the year. You have indicated that the process of incorporation could take as long as several months to complete. You asked:

1) Is it reasonable to assume that all business activity, from the date of the decision to incorporate to the date of incorporation, is business activity of the corporation?

2) Are there absolute time limits established for business conversions and new business incorporations for the purpose of determining whether expenses incurred prior to incorporation are considered incurred by the corporation?

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following comments.

As discussed in our Interpretation Bulletin IT-454 "Business Transactions Prior to Incorporation" ("IT-454"), where a business is commenced or purchased by persons with the intention that it will be carried on by a corporation, it often happens that the commencement or the purchase of the business, and related transactions including transactions prior to the commencement of business, occur before the actual date of incorporation. Accordingly, since the corporation does not exist in law before the date of incorporation, transactions occurring before the incorporation date cannot, legally, be accounted for by the corporation.

However, as provided in paragraph 2 of IT-454, the Canada Business Corporations Act and certain provincial legislation (including Ontario) provide that a corporation may, within a reasonable time after it comes into existence, adopt any written contract made in its name or on its behalf before it comes into existence. In respect of other jurisdictions that have not enacted legislation allowing such adoption, we will normally accept the accounting for pre-incorporation transactions by a "newly" formed corporation if the following conditions are met:

(a) the facts clearly indicate that it is the intention of those persons who authorize the transactions that the business will be carried on by a corporation;

(b) the period of time between the commencement or purchase date and the incorporation date is relatively short or, if not, the delay is not due to any action taken or not taken by the parties involved;

(c) there is no dispute between the persons authorizing the transactions and the newly formed corporation as to who will account for the transactions;

(d) the effect on the combined tax liabilities of the parties involved is negligible; and

(e) the corporation adopts any written contract made it its name or on its behalf before it came into existence in respect of the pre-incorporation transactions it is accounting for.

Please note, as provided in paragraph 5 of IT-454 and relevant to your particular situation, we will not accept the accounting for pre-incorporation transactions in the corporation where the proprietor or partners of a partnership incorporate an "existing" business. Pre-incorporation transactions of the proprietor or partners will be accepted where they incorporate a newly acquired business. A copy of IT-454 can be found on our website at www.cra-arc.gc.ca.

Whether or not business activity from the date of the decision to incorporate to the actual date of incorporation relates to or can be accounted for by the corporation, can only be determined after all the facts are known. As such, there are no absolute time limits set for business conversions and new business incorporations for the purpose of determining whether expenses incurred prior to incorporation are considered incurred by the corporation.

We trust this information is helpful.

Yours truly,

Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch