8 June 2009 External T.I. 2008-0305301E5 - CMT credit carryover after Acquisition of Control

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.

Principal Issues: The corporate taxpayer sold the assets of its business and will be subject to CMT as 50% of the gain on the sale of goodwill will be subject to income tax. However, 100% of the gain is included in accounting income and subject to CMT. Can the corporation utilize the CMT credits subsequent to the acquisition of control?

Position: The CMT credits will not be deductible after the acquisition of control as the same business will not be continued by the corporation.

Reasons: The principles underlying subsection 111(5) of the ITA will be applied for interpreting subsection 53(7) of the TA. Subsection 111(5) of the ITA does not allow the deduction of non-capital losses after an acquisition of control of a corporation unless the business that generated the losses is continued.

In this case all of the assets are sold and the business has ceased operations, all that remains is the shell corporation. Therefore, the business that generated the losses will not be continued and the CMT credits will not be deductible.

XXXXXXXXXX 					2008-030530

June 8, 2009

Dear XXXXXXXXXX :

Re: Corporate Minimum Tax ("CMT") credit carryovers after an Acquisition of Control

This is in response to your email dated December 24, 2008, concerning the deduction of CMT credits after an acquisition of control.

The situation outlined in your letter appears to relate to a factual one. Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

In your situation all of the assets of a corporation that operated the business of a XXXXXXXXXX were sold and the XXXXXXXXXX ceased operations. A shell corporation remains. XXXXXXXXXX . You are asking for our opinion on whether the CMT credits will be deductible if another XXXXXXXXXX business is carried on by the corporation after the acquisition of control.

Section 53 of the Ontario Taxation Act, 2007 ("TA") allows a corporation to deduct CMT credits from Ontario corporate income tax payable. CMT credits are equal to the amount of CMT paid in a previous taxation year less any CMT credits previously deducted or expired. CMT credits earned in taxation years ending after March 22, 2007 may be carried forward for a period of 20 years.

Subsections 53(6) and 53(7) of the TA restrict the deduction of CMT credits after there has been an acquisition of control of a corporation. Subsection 53(7) states that after an acquisition of control, CMT credits are only deductible "...if the same business was carried on by the corporation for profit or with a reasonable expectation of profit..." Subsection 53(7) of the TA was modeled after subsection 111(5) of the federal Income Tax Act ("ITA") which restricts the deduction of non-capital losses carryovers after an acquisition of control. The principles underlying subsection 111(5) of the ITA are applicable for interpreting subsection 53(7) of the TA.

Subsection 111(5) of the ITA, essentially provides that where at any time, control of a corporation has been acquired, no amount in respect of the corporation's non-capital loss for a taxation year ending before that time, is deductible by the corporation in a subsequent taxation year.

However, paragraph 111(5)(a) of the ITA permits a corporation in computing its income for a particular taxation year ending after an acquisition of control to deduct a non-capital loss incurred before the acquisition of control provided that certain conditions are met. In that respect, subparagraph 111(5)(a)(i) of the ITA, requires the business which gave rise to such losses be carried on by the corporation for profit or with a reasonable expectation of profit throughout the particular taxation year.

The principal that has emerged from case law with respect to the application of subparagraph 111(5)(a)(i) of the ITA, is that the business of a corporation subject to an acquisition of control must continue actively after the acquisition of control in order for the non-capital loss carryovers to be deductible. When a corporation disposes of all its assets and ceases operations, this is generally a good indication that the business has been terminated. However, whether a business has been terminated is a finding of fact which has to be made on a case by case basis.

In addition, paragraph 4(c) of Interpretation Bulletin 206R, Separate Businesses, provides guidance in determining if two businesses are considered the same business after an acquisition of control. This paragraph provides that two operations will not be considered the same business if the first business ceased operations before the second operation began. Factors to consider when determining if a business ceases operations include the sale of inventory and the dismissal of all employees.

In your situation, it is our view that the same business could not be continued since the assets of the corporation have been sold and the operations have ceased. Therefore, the CMT credits would not be deductible after the acquisition of control.

We trust these comments are helpful.

Lita Krantz
Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch