28 April 1994 Internal T.I. 9331017 - TERMINAL LOSSES & LOSS OF TAX EXEMPT STATUS

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.

SUMMARY FILE # 933101

Principal Issues:

Whether a corporation going from non-taxable to taxable status & therefore subject to 149(10) can claim a terminal loss

Position TAKEN:

Yes. The corporation will be entitled to that terminal loss.

Reasons FOR POSITION TAKEN:

The corporation will be able to claim the terminal loss to the extent that it could not be deducted in the year ending at the time of the change in status or as a non-capital loss in the three preceding years.

											April 28, 1994

	Winnipeg District Office					Head Office
	Basic Files   							Rulings Directorate
L. Holloway
	Attention: Cliff Sachvie			(613) 957-8953
	    									933101

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This is in reply to your memorandum of October 24, 1993 requesting that we provide confirmation of the tax consequences to the taxpayer upon a deemed disposition under 149(10) of the Income Tax Act (the "Act"). Specifically, you asked whether such a disposition can create a terminal loss which can be carried forward to future years in which a corporation's status is that of a taxable entity.

It is your view that where a corporation ceases to be exempt under 149(1)(d) of the Act and the capital cost of depreciable assets exceeds their fair market value immediately before the change in control, that excess referred to in subparagraph 149(10)(c)(ii) of the Act is a component which should be taken in account when calculating total depreciation for prior years pursuant to paragraph 13(21)(e). Thus, the amount which a Crown corporation would propose to claim as a terminal loss is deemed to have been allowed to it as capital cost allowance for taxation years ending before the year of deemed disposition of its depreciable assets. Accordingly, this results in a reduction of the Crown corporation's undepreciated capital cost to fair market value thereby eliminating any potential terminal loss.

Our Comments

The issue of whether a terminal loss is available where a corporation ceases to be tax exempt is one in which the Department has examined many times over the years. Our current position is summarized in a memorandum to the Toronto District Office dated June 29, 1993, as follows:

"The chronological summary of the Department's views with respect to the application of subsection 149(10) is very comprehensive showing as it does the transition from the view that a terminal loss does not arise on the deemed disposition of depreciable property of an exempt corporation to the more recent view (September 14, 1992) that a terminal loss in the year of change in exempt status is allowable. This crystallization of view came about due to a further review of the words in the subsection,

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Thus, we were able to state in a letter of September 14, 1992 on a similar matter, the following:

"Subsection 149(10) is applicable to a corporation that ceased to be exempt from Part I tax on its taxable income and under paragraph 149(10)(a), the corporation's taxation year will be deemed to have ended immediately before it ceases to be exempt.

Under paragraph 149(10)(b), such a corporation is deemed to have disposed of all its property, except Canadian or foreign resource property, immediately before the time that is immediately before the change in status, and reacquired the same property at fair market value. Where a corporation ceases to be tax-exempt and realizes a terminal loss as a consequence of the application of paragraph 149(10)(b), it will be able to claim that amount in a future year only to the extent that it could not be deducted in the year ending at the time of the change of status or as a non-capital loss in the three preceding years as provided in paragraph 149(10)(d). Paragraph 149(10)(c) provides that where paragraph 149(10)(b) applies and the fair market value of depreciable property is less than its capital cost immediately before the disposition, the original capital cost is preserved and the difference is deemed to have been allowed as capital cost allowance for years prior to the deemed disposition."

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch