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: Meaning of similar properties.
Position: Question of fact but in this case it would appear that the properties would not be similar.
Reasons: The law.
XXXXXXXXXX Michael Cooke
2003-000072
February 17, 2003
Dear XXXXXXXXXX:
Re: Deductibility of Non-Capital Losses on an Acquisition of Control
This is in reply to your facsimile letter dated January 28, 2003, wherein you requested our views on the meaning of "similar properties" as that term is used in subparagraphs 111(5)(a)(ii) and 88(1.1)(e)(ii) of the Income Tax Act (the "Act").
In your letter you describe the following two fact situations:
In the first situation, a profitable corporation that is in the business of producing a type of flour that can only be used for producing bread acquires control of a corporation that has accumulated non-capital losses from its bread baking business. In the second situation, a profitable farm corporation that is in the business of growing hay that is used to feed dairy cattle acquires control of another farm corporation that has accumulated non-capital losses from its dairy cattle business. In both situations you indicate that the corporation with accumulated losses will be wound-up into, pursuant to subsection 88(1), or vertically amalgamated with, pursuant to subsection 87(1), its respective parent corporation immediately after control has been acquired.
It is your view that the deduction of the accumulated non-capital losses by each loss corporation's respective parent corporation after the winding-up or amalgamation will not be precluded solely because the particular properties sold, leased, rented or developed by the particular loss corporation are not considered to be "similar properties", as that term is used in subparagraph 111(5)(a)(ii) and subparagraph 88(1.1)(e)(ii), to the particular properties sold, leased, rented or developed by its respective parent corporation. In support, you maintain that the facts in the above two described situations are more analogous to those in Gaz Metropolitan Inc. v The Queen, 98 DTC 1751 (TCC) than those in Manac Inc. v The Queen, 98 DTC 6605 (FCA). You also referred to previous technical interpretations wherein we have expressed the view, for example, that the extracting, processing and/or selling of primary metals by one corporation could be considered as similar properties to industrial minerals that are extracted, processed and/or sold by a second corporation that for the purposes of subsection 111(5)(a)(ii).
You ask whether we agree with your views.
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 706R5 ("IC-70-6R5") dated May 17, 2002. 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. Notwithstanding the above, we can offer the following comments.
As you know, it remains a mixed question of fact and law as to whether or not in a particular situation, the particular properties sold, leased, rented or developed by a loss corporation would be "similar properties" to those sold, leased, rented or developed by a profitable corporation. It has been our practice to interpret "similar" as meaning "of the same general nature or character" and in the context of determining whether a particular type of business is similar to another business we have interpreted the phrase "similar business" in a reasonably broad manner (see paragraph 18 of IT-259R3). For example, a crop farming business and a dairy farming business may be considered as being similar businesses in the sense that they both are farming businesses.
Notwithstanding the above, for the purposes of interpreting paragraphs 111(5)(a) and 88(1.1)(e), in our view, it does not seem reasonable to consider that bread is a similar property to flour. Similarly, it does not seem reasonable to consider that hay is a similar property to dairy products.
Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R5.
Yours truly,
David Palamar
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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