19 December 2002 External T.I. 2002-0171065 - Arm's Length Purchase & Sale of Shares

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: Acquisition of control - loss streaming rules and sale of shareholder loan receivable.

Position: General comments only.

Reasons: This is a completed or proposed transaction and we don't have all the facts.

XXXXXXXXXX 2002-017106

December 19, 2002

Dear XXXXXXXXXX:

Re: Arm's-Length Purchase and Sale of Shares of a Corporation

This is in response to your letter dated September 24, 2002, wherein you requested our views on the application of certain provisions of the Income Tax Act ("the Act") in the following situation.

In your letter you indicate that a taxpayer is selling the shares of a corporation it controls to an arm's-length purchaser. The corporation has incurred non-capital losses over the past few years, some of which have already expired. You have inquired regarding the income tax treatment of these expired losses. You also indicate that the purchaser will acquire a debt owing to the selling shareholder by the particular corporation and wish us to confirm that the repayment of this debt by the corporation would not give rise to taxable income in the hands of the purchaser.

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 70-6R5 dated May 17, 2002 ("IC 70-6R5"). 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 control of a corporation has been acquired by a person or a group of persons, subsection 111(5) of the Act provides, inter alia, that no amount of a non-capital loss incurred before that time is deductible for a taxation year ending after that time except to the extent that the non-capital loss may reasonably be regarded as its loss from carrying on a business and the particular business which gave rise to such loss is 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. Where the requirements of subsection 111(5), including the above conditions are met, the non-capital losses can be applied to reduce the corporation's income from that particular business or income from a same or similar business in the post-acquisition period.

It is primarily a question of fact whether a particular business is carried on by a corporation for profit or with a reasonable expectation of profit throughout a particular taxation year and whether that business is the same or similar business to any other business for the purposes of subparagraphs 111(5)(a)(i) and (ii) of the Act. You may wish to refer to Interpretation Bulletin IT-302R3 for additional discussion on this topic.

We would note, however, that where the carryforward period for a non-capital loss already expired before control of the particular corporation was acquired, this loss would not be deductible by the corporation.

In answer to your second question, where a debt owing to a shareholder by a corporation has been acquired by an arm's-length person for an amount that was equal to its principal amount outstanding at that time the repayment of the principal amount of that debt by the particular corporation would not be considered to be taxable income of the purchaser.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R5.

Yours truly,

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