28 August 2000 External T.I. 2000-0017335 - COMMENCEMENT OF BUSINESS OPERATIONS

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:

Taxpayer in start-up phase of a business venture with customer outside Canada. After extended negotiations and some work, the venture collapsed. Taxpayer wants to know if the costs can be claimed as business losses.

Position TAKEN:

Question of fact. Insufficient information provided to determine if the business had commenced business operations.

Reasons:

Insufficient information.

XXXXXXXXXX 2000-001733
T. Young
August 28, 2000

Dear Sir:

Re: Business Losses

This is in reply to your letter of January 15, 2000, requesting a ruling on whether your client can claim business losses related to a failed business venture.

In the letter you enclosed with your correspondence, your client describes a series of events where your client engaged in various activities to generate income from the sale of XXXXXXXXXX equipment and the provision of advisory services to the government of XXXXXXXXXX.

Your client, operating as XXXXXXXXXX an unincorporated business, conducted several meetings in Canada and XXXXXXXXXX with officials of the XXXXXXXXXX government; reached an agreement on XXXXXXXXXX; provided the government officials with a business plan and price lists; and "donated" certain XXXXXXXXXX equipment to the project.

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 ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, as in your situation, the enquiry should be addressed to the relevant Tax Services Office. Also, it would be necessary to review all relevant documentation before a determination of the tax implications could be made. Therefore, we can only provide you with the following general comments.

Residents of Canada are subject to tax in Canada on their world-wide income. As such, any income earned or expenses incurred by an unincorporated business operating outside of Canada are generally treated no differently than if the business operated in Canada.

In order to determine if expenditures are deductible as business expenses, it must first be determined whether a taxpayer was carrying on a business. The Agency's general position on the commencement of business operations is set out in IT-364, "Commencement of Business Operations" (copy enclosed). Paragraph 2 of IT-364 states:

2. It is not possible to be specific about the point in time when a contemplated business becomes an actual business. Generally speaking, it is the Department's view that a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations. In order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries. This requirement is applicable whether the projected business is intended to be a continuing one or is to be a single transaction in the form of an adventure in the nature of trade. Where an activity consists merely of a review of various business possibilities in the expectation or hope that information will be obtained to justify going into a business of some kind, such an activity does not represent the commencement of a business. A business would be reviewed as being merely contemplated for the future if no serious or reasonably continuous efforts are being made to begin normal business operations. The comments in this paragraph do not apply, of course, to an existing business that is considering expansion or diversification as distinct from the undertaking of a new and separate business.

In order to make a determination of whether business has commenced and what expenses, if any, would be deductible, the Tax Services Office would need more information including the nature of the XXXXXXXXXX, agreement referred to between your client and the XXXXXXXXXX, whether or not XXXXXXXXXX is still carrying on business, and more details about the expenditures.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
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