7 May 1993 External T.I. 9312175 F - Utilization of Business 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.

Tax Executives Institute Seminar

Question 9

Utilization of Business Losses

Opco is owned equally by ACo and BCo, two companies which are not related to each other. Because of the business losses it sustained, Opco has been inactive for the last year earning only some minor passive income. ACo intends to purchase all of the shares of Opco held by BCo and reactivate Opco with the "identical" operations that Opco was conducting when it sustained the business losses. Given that the purchase of Opco shares by ACo from BCo results in an acquisition of control of Opco by ACo, would the non-capital losses incurred by Opco prior to the acquisition of control be available to Opco to be applied against its business income earned after such acquisition of control?

Department's Position

Where control of a corporation has been acquired by a person or a group of persons, one of the conditions stipulated in subsection 111(5) of the Act that must be met in order that any non-capital losses of the corporation continue to be deductible is that the business which gave rise to such losses must be carried on by the corporation for profit or with a reasonable expectation of profit throughout the particular taxation year in which the deduction is sought.

Whether or not the business which will be carried on by a loss corporation following a change of control is the same business as that which gave rise to the losses can only be determined following a review of all of the relevant facts pertaining to the particular situation. Since we do not have all of the facts relating to this particular example, we can only provide the following general comments with respect to this matter.

In paragraph 4 of Interpretation Bulletin IT-206R titled "Separate Businesses" it is stated that "where one business operation succeeds another...(and)...where the succeeding business operation of a corporation is of the same kind, but ownership of the corporation has changed, the two operations will normally not be considered the same business if the first business ceases operation before the second operation begins. Whether a business ceases is dependent upon factors such as the following:

(i)     the sale of all inventory,

(ii)     dismissal of all employees,

(iii)     vacation of business premises.

The sale of all fixed assets of a business is not considered a mandatory requirement for the ceasing of a business if it can otherwise be established to have ceased."

Consequently, if the business that sustained the losses can be considered to have ceased operation prior to the acquisition of control, the non-capital losses incurred by the corporation prior to the acquisition of control will not be available for carry-forward after the acquisition of control.