11 June 1990 External T.I. 59750 F - Acquisition of Control - Amalgamation of Loss Corporation with Profitable Corporation

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.

19(1)

June 11, 1990

Dear Sirs:

Re:  Paragraph 111(5) (a) of the Income Tax Act (the "Act") Request for technical interpretation

This is in reply to your letter of March 8, 1990 in which you requested our opinion regarding the application of paragraph 111(5)(a) of the Act in the circumstances described below involving an acquisition of control resulting from an amalgamation of a loss corporation ("Lossco") with an unrelated profitable corporation ("Profitco") In particular, you seek confirmation that the businesses of Profitco and Lossco would be regarded as similar businesses such that the deduction of Lossco's non-capital losses from the income generated by the Profitco business would not be prohibited by subparagraph 111(5)(a)(ii) of the Act. 

Facts and Assumptions

24(1)

(24) 1

Your views

It is your view that if after the amalgamation Amalco continues to carry on business of                  24(1)  for profit or with a reasonable expectation of profit the non-capital losses incurred by Lossco prior to the amalgamation will be deductible against all of the income of Amalco on the basis that such income will be derived either from the business that generated the losses or from a business substantially all of the income of which is derived from the sale, leasing, rental or development of similar properties or the rendering of similar services.  In your view, although  24(1) may be regarded as having different physical characteristics, all three embrace computer science disciplines which have as their objective the manipulation, structuring and communication of data.   

Our comments

You have requested confirmation as to the tax consequences of specifically proposed transactions, namely, the amalgamation of Lossco and Profitco and the carrying on by Amalco of the businesses formerly carried on by Lossco and Profitco.  As explained in Information Circular 70-6R issued by Revenue Canada, Taxation dated December 18, 1978 (the "Circular"), assurance as to the tax consequences of specifically proposed transactions will not be provided except in response to a request for an advance income tax ruling submitted in accordance with the guidelines set out in the Circular.

Although we cannot provide you with any assurance as to the tax consequences of the proposed amalgamation, you may find the following general comments to be of some assistance.

In our view, the word "similar" in the context of subparagraph 111(5)(b)(ii) of the Act has a narrower meaning than "having characteristics in common".  To take such a broad interpretation would render the limitation in that subparagraph practically meaningless.  We interpret the word "similar" in this context to mean "of the same general nature or character".

Although we have not previously ruled on the similarity of computer hardware, systems software and applications software, based on generally accepted definitions of these properties, we would ordinarily consider systems software to be of the same general nature or character as applications software for the purposes of subparagraph 111(5)(a)(ii) of the Act.  They are both comprised of programs or sets of instructions that are designed to cause certain physical devices, the computer hardware, to perform a particular task or to respond in a particular fashion. However, computer hardware, such as printers, processors, monitors, scanners and other physical devices, would generally not be considered to be similar to software.  Computer hardware is tangible while, software is intangible. In situations where the software is imbedded in the hardware or where the item of software and the item of hardware can only be sold as a unit or package, it may be difficult to identify the property in question as being either hardware or software.

Finally, when considering whether or not to apply for an advance income tax ruling you should bear in mind that the similarity of properties sold, leased, rented or developed and services rendered in two or more different businesses for the purposes of subparagraph 111(5)(a)(ii) is primarily a question of fact that can only be determined having regard to all of the relevant facts and circumstances and, as explained in paragraph 14(1) of the Circular, we would be unable to rule where the matter on which a determination is requested is primarily one of fact and the circumstances are such that all of the relevant facts cannot be established at the time of the ruling request.

The foregoing comments are provided in accordance with paragraphs 23 and 24 of the Circular and are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorReorganizations and Non-resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch