3 June 1985 Income Tax Severed Letter 5-7656 - []

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 P.K. Tang (613) 995-1787

XXXX

June 3, 1985

Dear Sirs:

Re: Subsection 111(5) of the Income Tax Act

This is in reply to your letter of April 19, 1985 wherein you request our view with respect to the application of subsection 111(5) of the Income Tax Act (the "Act") as it relates to the following situation:

A Co. is a company that carried on a resource business. A Co. has non-capital loss carryforwards which arose within the period specified under subsection 111(1) of the Act.

A Co.'s producing properties were disposed of to its subsidiary for consideration that included interest bearing notes receivable. A Co. continues to own investments and non-producing resource properties. A Co.'s personnel has recently been reduced.

Subsequent to the disposition of its producing properties, A Co.'s control was acquired by another person.

A Co.'s revenue for the current year may include interest on the above-mentioned notes receivable, a refund from the company's pension plan and management fees for providing management services to its subsidiaries.

It is your belief that the interest income and the pension refund received by A Co. constitutes income from the business which was carried on before the acquisition of control took place and that the non-capital loss previously accumulated can be deducted against this income. We regret that we are unable to agree with you. Under paragraph 111(5)(a) of the Act, a corporation cannot deduct from its income for a taxation year a non-capital loss incurred in a preceeding year from carrying on a business if, at the end of the taxation year, the corporation is controlled by a person or persons who did not control the corporation at the end of that preceeding year, and the corporation did not, throughout the taxation year, carry on the business in which the non-capital loss was sustained. Although, as you stated in your letter, the interest income received by A Co. may be deemed to be income from a business by virtue of subsection 129(6) and the pension refund can be said to be related to the company's business carried on prior to the acquisition of control, the company did not, after the control was acquired by the other person, continue to carry on the resource business that gave rise to the loss. It should be noted that for the purpose of subsection 111(5), it is not the type of income that counts but it is the type of business being carried on that must be considered. This is brought out quite clearly in paragraph 6 of Interpretation Bulletin IT-302R .

We hope the above will be helpful.

Yours truly,

for Director Corporate Rulings Division Legislation Branch