2000 Ruling 2000-0053073 - Utilization of losses - "That" business

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 XXXXXXXXXX are similar properties for purposes of subsection 111(5) of the Act.

Position: Yes.

Reasons: Meaning of "Similar", past interpretations. Both XXXXXXXXXX are part of the business of XXXXXXXXXX .

XXXXXXXXXX 2000-005307

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We acknowledge receipt of your correspondence dated XXXXXXXXXX and our telephone conversations in connection herewith.

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

In this letter, unless otherwise expressly stated:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and unless otherwise stated, every reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "ACO" means XXXXXXXXXX;

(c) "BCO" means XXXXXXXXXX;

(d) "non-capital losses" has the meaning assigned by subsection 111(8); and

(e) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as set forth below.

Facts

1. BCO is a taxable Canadian corporation which was established in XXXXXXXXXX. Its primary business activity is the processing of XXXXXXXXXX.

2. BCO supplies the wholesale and retail market. The total gross revenues of BCO amounted to $XXXXXXXXXX from the time it commenced operations to XXXXXXXXXX. The gross revenue by products consisted of XXXXXXXXXX sales amounting to $XXXXXXXXXX and XXXXXXXXXX sales amounting to $XXXXXXXXXX.

3. BCO currently owns assets which include a building specifically designed for the processing of XXXXXXXXXX.

4. Due to economic conditions in the market place for XXXXXXXXXX, BCO did not realize the profits anticipated from the sale of its XXXXXXXXXX products and has incurred non-capital losses of approximately $XXXXXXXXXX.

5. ACO is a taxable Canadian corporation which is a XXXXXXXXXX ACO's primary business activity is the XXXXXXXXXX

6. ACO supplies the wholesale and retail market.

7. ACO is profitable and will remain profitable for the foreseeable future.

8. ACO and BCO are not related persons within the meaning of subsection 251(2).

9. The business operations of both ACO and BCO are carried on in Canada.

10. Immediately preceding the share purchase, BCO will be actively operating in the manufacture and sale of XXXXXXXXXX, employing XXXXXXXXXX individuals.

Proposed Transactions:

11. ACO intends to purchase XXXXXXXXXX% of the common and preferred shares of BCO. As a result of this transaction, ACO will acquire control of BCO for purposes of the Act.

12. Following the purchase of the shares of BCO by ACO, BCO will continue to carry on its business of XXXXXXXXXX. For greater certainty, BCO will:

a) retain significantly all of its existing assets and resources, including inventories, land, buildings, substantially all of the existing processing equipment, the existing employees, suppliers and customers;

b) increase its XXXXXXXXXX capacity by upgrading the existing processing equipment and continue the sale of XXXXXXXXXX;

c) purchase additional equipment from third party suppliers which may be financed through the XXXXXXXXXX with additional funding if necessary to be provided by ACO;

d) add XXXXXXXXXX manufacturing and processing equipment and begin the production and sale of XXXXXXXXXX;

e) discontinue the production of XXXXXXXXXX, as well as disposing of the related XXXXXXXXXX and packaging equipment; and

f) introduce efficient marketing, production and management practices.

13. The projected gross revenue from XXXXXXXXXX sales generated by BCO is anticipated to be $XXXXXXXXXX per month. The projected gross revenue generated by XXXXXXXXXX sales is anticipated to be $XXXXXXXXXX per month.

Purpose of Transactions:

14. The acquisition of BCO by ACO will be undertaken for the purposes of improving profitability by increasing economies of scale and efficiencies through the utilization of the XXXXXXXXXX production facilities, employees, suppliers and customers of both companies.

Ruling Requested and Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:

A. Provided that the business of BCO is carried on by BCO, as described in paragraph 12 and 13 above, for profit or with a reasonable expectation of profit throughout a particular taxation year after the acquisition of control of BCO by ACO, as described in paragraph 11 above, and subject to the time limitations set out in paragraph 111(1)(a) of the Act, the restrictions set out in subsection 111(3) of the Act and any other requirements in the Act regarding deductibility of non-capital losses, the non-capital losses of BCO as determined pursuant to subsection 111(8) of the Act may be deducted under paragraph 111(5)(a) of the Act in computing the taxable income of BCO for that taxation year to the extent of the income earned by BCO for that year from its business of manufacturing and processing XXXXXXXXXX.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Nothing in this letter should be considered as confirmation of the income tax consequences of any of the transactions described in this letter other than as specifically described.

Yours truly,

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