20 September 2001 External T.I. 2001-0097755 - acquisition of control- non capital losses

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Flow through of non-capital losses after an acquisition of control.

Position:

Question of fact

Reasons:

The availability of the non-capital losses will depend on whether the business that sustained those losses is still being carried on.

			2001-009775
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
October 12, 2001

Dear XXXXXXXXXX:

Re: Deductibility of Non-Capital Losses on an Acquisition of Control

This is in reply to your letter dated August 13, 2001, wherein you requested our views on the application of subsection 111(5) of the Income Tax Act (the "Act") where control of a corporation is acquired by another corporation in the circumstances described below.

A Canadian corporate real estate developer ("Purchaserco") wishes to purchase the shares of an arm's-length Canadian corporation ("Targetco"). Targetco's principal assets consist of a tract of undeveloped land and non-capital loss carryforwards that arose from previous real estate ventures. It will likely take upwards of five years until the undeveloped land will commence to be developed as a condominium project. After the purchase of the Targetco shares, Purchaserco will amalgamate with Targetco.

Our Comments

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R4 dated January 29, 2001. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following general comments.

Where there has been an amalgamation under subsection 87(1), subsection 87(2.1) permits the new corporation to deduct any non-capital loss of a predecessor corporation. The utilization of these losses by the new corporation is, however, subject to the restrictions imposed by subsections 111(3) to 11(5.4). 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, that must be met in order that any non-capital losses of the corporation continue to be deductible, 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.

In paragraph 4 of Interpretation Bulletin IT-206R, titled "Separate Businessess", 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 sale of all fixed assets of a business is not considered a mandatory requirement for the cessation of a business if it can otherwise be established to have ceased. Consequently, if the business that sustained the losses can be considered to have ceased operations prior to the acquisition of control, the non-capital losses incurred by the corporation prior to the acquisition of control will not be available for carry-forward after the acquisition of control.

Where the business of Targetco has not ceased prior to the acquisition of control, paragraph 14 of Interpretation Bulletin IT-302R3, entitled "Losses of a Corporation," outlines a number of factors to be considered in determining whether the business of Targetco continues to be carried on. The following factors are mentioned in IT-302R3:

a) location of the business carried on before and after the acquisition of control

b) nature of the business

c) name of the business

d) nature of income-producing assets

e) existence of a period or periods of dormancy

f) extent to which the original business constituted a substantial portion of the activities of the corporation in the allocation of time and financial resources.

Furthermore, it is our view that the business activities of the loss business must continue to be significant. If not, we would have to consider whether that same business was still being carried on for profit or a reasonable expectation of profit. In our view, in the situation you describe, it is questionable whether the loss business would be considered to have been carried on after the acquisition of control.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

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