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: Whether non-capital losses of Targetco are available to Amalco?
Position: It is a question of fact.
Reasons: The availability of the non-capital losses will depend on whether the business that sustained those losses was still being carried on.
XXXXXXXXXX 2000-003017
F. Francis
Attention: XXXXXXXXXX
December 18, 2000
Dear Sirs:
This is in reply to your letter of May 30, 2000, wherein your requested a technical interpretation with respect to the application of paragraph 111(5)(a) of the Income Tax Act (the "Act") to the following hypothetical situation:
1. Vendorco is a "taxable Canadian corporation" as defined in subsection 89(1) of the Act.
2. Targetco is a taxable Canadian corporation. All of the issued and outstanding shares of the capital stock of Targetco are owned by Vendorco.
3. Targetco carries on a business ("the business"). Targetco has a "non-capital loss" as defined in subsection 111(8) from carrying on the business.
4. Targetco incorporates Newco, a taxable Canadian corporation. Targetco initially owns all of the issued and outstanding shares of the capital stock of Newco.
5. Targetco sells all of its assets to Newco. As consideration, Newco assumes the liabilities of Targetco and issues shares to Targetco. Targetco and Newco jointly elect under subsection 85(1) of the Act with respect to the transfer of any "eligible property" as defined in subsection 85(1.1) of the Act.
6. Newco carries on the business previously carried on by Targetco without interruption.
7. Purchaseco is a taxable Canadian corporation that is not related to any of Vendorco, Targetco or Newco.
8. Purchaseco acquires all of the shares of the capital stock of Newco from Targetco for fair market value consideration.
9. Newco continues to carry on the business.
10. At a future time, Targetco is acquired by Purchaseco, Targetco has not utilized the non-capital loss.
11. Immediately after the acquisition of Targetco by Purchaseco, Targetco and Newco are amalgamated within the meaning of subsection 87(1) of the Act, to form Amalco. Amalco carries on the business.
Pursuant to a telephone conversation of October 17, 2000, you enquired as to whether our position would differ if, instead of using Newco, Purchaseco initially acquires the assets of Targetco and subsequently acquires the shares of Targetco.
OUR VIEWS
Where control of a corporation has been acquired by a person or a group of persons, one of the conditions stipulated in subsection 111(5) of the Act with respect to the deductibility of non-capital losses of the corporation is that the business which gave rise to such losses must be carried on by the corporation for profit or with a reasonable expectation of profit throughout the particular taxation year in which the deduction is sought.
We direct your attention to paragraph 4 of Interpretation Bulletin IT-206R entitled "Separate Businesses" wherein it is stated that "Where one business operation succeeds another ... (and) ... where the succeeding business operation of a corporation is of the same kind, but ownership of the corporation has changed, the two operations will normally not be considered the same business if the first business ceases operation before the second operation begins. Whether a business ceases is dependent upon factors such as the following:
(i) the sale of all inventory,
(ii) dismissal of all employees,
(iii) vacation of business premises."
The determination as to whether the business of Targetco ceased when the assets were transferred to Newco is a question of fact. Consequently, the availability of the non-capital losses of Targetco after the acquisition of control will depend on whether the business that sustained those losses was still being carried on.
The above comments represent our general view with respect to the subject matter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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