CRA applies Ensite in determining whether assets are “used in the course of carrying on business”

One of the requirements for the continuity rule in s. 127.5(4.2) to apply where there has been an acquisition by an eligible entity of assets from a seller with whom the eligible entity did not deal at arm’s length is that (per s. 125.7(4.1)(b)(i)) “immediately prior to the acquisition, the fair market value of the acquired assets constituted … all or substantially all of the fair market value of the property of the seller used in the course of carrying on business.”

CRA indicated that it was appropriate to apply the Ensite test that “[i]f the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business.” Accordingly: regarding a situation where the seller (BCo) transferred the “Division Assets” to ACo and retained other assets (the “Other Assets”):

[W]here the Other Assets were employed and risked in BCo’s business such that their withdrawal would have a decidedly destabilizing effect on BCo’s operations, such assets must be considered when ascertaining whether, immediately prior to the acquisition by ACo, the fair market value of the Division Assets constituted all or substantially all of the fair market value of the property of BCo used in the course of carrying on business under subparagraph 125.7(4.1)(b)(i).

Neal Armstrong. Summary of 8 June 2021 External T.I. 2020-0864051E5 under s. 125.7(4.1)(b)(i).