18 July 1988 Income Tax Severed Letter 5-5858 - []

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.

XXXX Wyman M. Webb (613) 957-2109

XXXX

JUL 18 1988

Dear Sirs:

Re: Subparagraph 111(5)(a)(ii) of the Income Tax Act (the "Act")

This is in reply to your letter of March 28, 1988 in which you requested our interpretation of the expression "...from any other business substantially all of the income of which was derived from the sale... of similar properties..." as contained in subparagraph 111(5)(a)(ii) of the Act, based on the following hypothetical situation:

1. Company A derives its income from the manufacture and sale of products X and Y.

2. Company B derives its income from the manufacture and sale of product Z.

3. Company A acquires control of Company B and Company B has a significant non-capital loss carry-forward as of the date of the acquisition of control.

4. The activities of Company B will be continued with a reasonable expectation of profit.

5. Products X and Y are not similar.

6. One-half of the profit of Company A is derived from the sale of product X and the balance of the profit of Company A is derived from the sale of product Y.

7. Product X is similar to product Z of Company B but product Y is not similar to product Z. The activities related to products X and Y are closely related.

8. The activities related to product X will be moved to Company B and, since it is not practical to move only the activities related to product X, the activities related to product Y will also be moved to Company B.

9. Company B will then have two locations - one handling product Z and one handling products X and Y.

The number of businesses that Company B will be carrying on following the transfers described in the example cannot be determined. Depending on the circumstances of a particular case, Company B could be carrying on a number of different businesses for the purposes of subparagraph 111(5)(a)(ii) of the Act such as:

(1) the manufacturing of product X,

(2) the selling of product X,

(3) the manufacturing of product Y,

(4) the selling of product Y,

(5) the manufacturing of product Z and

(6) the selling of product Z.

For the purposes of this letter it will be assumed that the manufacturing and selling of each product are so interconnected and interdependent that they cannot be considered to be separate businesses. It will also be assumed that Company B, with respect to products X and Y, is either carrying on the one business of selling products X and Y or is carrying on two separate businesses - (1) the selling of product X and (2) the selling of product Y. For a general discussion of whether or not a company is carrying on one or more businesses, please note the comments contained in Interpretation Bulletin IT- 206R.

It is your understanding that there is no necessity to determine whether Company B is operating a single business or more than one with respect to the sale of products X and Y so long as only the income generated from the similar product, X, is taken into consideration for the purposes of subparagraph 111(5)(a)(ii) of the Act.

We are unable to agree with your understanding of the interpretation of subparagraph 111(5)(a)(ii) of the Act. Subparagraph 111(5)(a)(ii) of the Act provides as follows:

(ii) only to the extent of the aggregate of the corporation's income for the particular year from that business and, where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services; and ...(emphasis added)

In order for income from another business to satisfy the provisions of subparagraph 111(5)(a)(ii) of the Act, substantially all of the income of that business must be derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services.

If, in the hypothetical situation described above, for the purposes of subparagraph 111(5)(a)(ii) of the Act, Company B is only carrying on one business with respect to the selling of products X and Y, then the income generated from that business, i.e. the sale of products X and Y, would not satisfy the requirements of subparagraph 111(5)(a)(ii) of the Act as substantially all of the income from that business is not derived from the sale of X, the product which is similar to product Z. The income derived from the sale of product X would not be separated from the income derived from the sale of product Y, if Company B is only carrying on one business with respect to the sale of products X and Y.

The foregoing comments should not be interpreted as implying that it would necessarily be our view in any actual situation similar to the above hypothetical situation that the manufacturing and selling of any products would, for the purposes of subparagraph 111(5)(a)(ii) of the Act, be considered to be one business. This question could only be answered upon an examination of all of the relevant facts of an actual situation.

Whether the requirements of subparagraphs 111(5)(a)(i) and (ii) of the Act have been satisfied in any particular case is a question of fact that can only be determined based on an examination of all of the relevant facts and related transactions. Our comments herein are opinions and not rulings, as explained in paragraph 24 of Information Circular 706R.

Yours truly,

for Director Reorganization and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch