18 October 1990 Administrative Letter 59586 F - Impact of Partnership on Pre-acquisition Losses

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.

October 18, 1990

Dear Sirs:

Re:  Impact of Partnership on Pre-Acquisition Losses Subsection 111(5) of the Income Tax Act (Canada) (the "Act")

We are responding to your letter, dated February 14, 1990, in which you requested our views on the deductibility of pre-acquisition losses in two hypothetical situations described below, in each of which, after an acquisition of control of a corporation, a loss business of the corporation is transferred to a partnership.

Situation No. 1

1.     Company B acquired all the shares of Company A in an arm's-length transaction.

2.     Company A had (prior to Company B's acquisition of control) incurred non-capital losses ("pre-acquisition losses") from carrying on a certain regulated business ("Div 1").

3.     Company C, which is not related to either Company A or Company B, carries on two regulated businesses ("Div 2 and Div 3") which are "similar businesses" with respect to Company A's Div 1, for purposes of subparagraph 111(5)(a)(ii) of the Act (i.e., substantially all of the income of each of Div 2 and Div 3 is derived from the sale, leasing, rental or development of properties similar to properties sold, leased, rented or developed, as the case may be, in Div 1 or from the rendering of services similar to those rendered in Div 1).

4.     Company A and Company C combine their businesses in a partnership. The income and losses of the partnership, based on the relative net fair market values of the assets contributed by Companies A and C, are allocated two-thirds to Company A and one-third to Company C.

     The three businesses continue to be operated as three separate divisions, with each of them reporting separately to the relevant regulatory authorities.

You have requested our views on whether:

(a)     assuming that the business of Div 1 continues to be carried on by the partnership for profit or with a reasonable expectation of profit throughout the relevant year and that the business so carried on will be the same business as that previously carried on by Company A, Company A will be considered to be carrying on the loss business for purposes of subparagraph 111(5)(a)(i) of the Act even though the business is carried on through a partnership and that partnership carries on business through three divisions; and

(b)     assuming that Div 1, Div 2 and Div 3 are in fact "similar businesses", Company A will satisfy the requirement of subparagraph 111(5)(a)(ii) of the Act, allowing Company A to deduct its pre-acquisition losses against Company A's share of the income from the partnership which includes income from similar businesses (being Div 2 and Div 3).

Our comments

It is our view that a corporate partner will normally be considered to be carrying on the businesses of the partnership of which it is a member. We would caution, however, that the addition of other assets upon the introduction of other partners may result in a different business being carried on by the partnership. Thus, if the partnership does not, in fact, carry on Div 1 as a separate business from Div 2 and Div 3, the business of the partnership may be a different business from Div 1 previously carried on by Company A. Please refer to our Interpretation Bulletin IT-206R for a discussion of some of the factors relevant to the determination of whether a corporation is carrying on the same business.

The income of a corporate partner from a business or businesses of the partnership would normally be considered to be income of that partner from a "similar business" for purposes of subparagraph 111(5)(a)(ii) of the Act if the criteria set out in subparagraph 111(5)(a)(ii) of the Act are satisfied by such business or businesses.

Situation No. 2

The facts of this situation are the same as those in Situation No. 1 above except that, prior to the formation of the partnership, Company A is amalgamated with Company D, a wholly-owned subsidiary of Company B. Company D carries on a profitable regulated business ("Div 4"). The amalgamated company ("AD Co") then forms a partnership with Company C. AD Co. contributes Div 1 to the partnership and continues to carry on Div 4 directly.

In your view the amalgamation should not affect the ability of AD Co. to deduct the pre-acquisition losses incurred by Company A in carrying on Div 1 from the income earned by AD Co. from the partnership. You also seek confirmation that, assuming that Div 1 and Div 4 are "similar businesses" for the purposes of subparagraph 111(5)(a)(ii) of the Act, AD Co. will be entitled to deduct the pre-acquisition losses from the income earned in Div 4.

Our comments

Subsection 87(2.1) of the Act, for the purpose of determining the extent to which subsection 111(5) applies to restrict the deductibility by an amalgamated corporation of any non-capital loss, deems the amalgamated corporation to be the same corporation as, and a continuation of each predecessor corporation. Therefore, the pre-acquisition losses of Company A will be deductible by AD Co. against its income from the partnership to the same extent that Company A would have been able to deduct such losses against its income from the partnership in Situation No. 1. Reference should therefore be made to our comments in response to Situation No. 1.

Subject to our comments above concerning the determination that Div 1 is being carried on by the partnership, and provided that Div 4 and Div 1 are "similar businesses", we confirm that AD Co. would be entitled to deduct the pre-acquisition losses from its income from Div 4.

The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2, dated September 28, 1990, and are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch