24 June 1993 Income Tax Severed Letter 9308815 - Canadian Branch Non-capital Loss

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                                    5-930881
XXXXXXXXXX                                          B. Rankin
                                                    (613) 957-8974

Attention: XXXXXXXXXX

June 24, 1993

Dear Sirs:

Re: Canadian utilization of undeducted losses of resource operations

This is in reply to your letter dated March 16, 1993 wherein you request our comments with respect to the successor corporation rules contained in section 66.7 of the Income Tax Act (the "Act") and to certain losses from the operation of a mine where production has ceased.

The successor corporation rules provide a mechanism by which certain undeducted expenditures related to mineral exploration and development activities of a particular taxpayer can be deducted by another taxpayer. The purchase of all or substantially all of the resource properties and a joint election filed by the previous owner and the purchaser are required. Business losses from the operation of a mineral resource are not eligible for this treatment.

We note that costs resulting in the business loss which is the subject of your query relate to personnel costs incurred for the closure of a mine. In our view it is unlikely that such closure costs would qualify to be treated as Canadian exploration or Canadian development expense and, consequently would not fall within the ambit of the successor corporation rules.

Personnel costs related to the closure of a mine would normally be included in determining an operating loss or "non-capital loss" for Canadian income tax purposes. Normally, a non-capital loss may be applied to reduce a taxpayer's income from all sources and is eligible for carry-back to the preceding three taxation years and carry- forward for a maximum of seven taxation years. If not claimed during this period, the loss expires.

Subsection 111(5) of the Act operates to permit the deduction of a non-capital loss (within the period of time indicated above) following a change in control of the corporation. Accordingly, following the purchase of a controlling number of shares in the loss corporation, the loss may be applied to reduce income from the business in which the loss was sustained or income from the sale of substantially similar products or services. Thus, it may be possible for a loss incurred to be applied against income from the new owner's continuance of the same business or income from a substantially similar business.

The successor corporation rules in section 66.7 of the Act affecting qualifying undeducted resource expenditures and subsection 111(5) of the Act affecting the application of undeducted non-capital losses are both complex provisions that contain strict requirements which must be satisfied before either provision is applicable. If you have any questions or would like to discuss our comments further, please feel free to contact the writer.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate