21 April 1994 TEI Roundtable Q. 10, 9410280 - 94 TEI ROUND TABLE REASONABLE EXPECTATION OF PROFIT

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.

DRAFT

Tax Executives Institute
1994 Annual Canadian Tax Conference

Question #10

ACQUISITION OF NON-CAPITAL LOSSES

In the situation where a person has acquired control of a corporation, subsection 111(5) of the Act requires that certain conditions be satisfied before the corporation is entitled to deduct any of the pre-acquisition non-capital losses realized by the corporation. One of the conditions is that the business to which the non-capital losses relate be carried on by the corporation with a reasonable expectation of profit throughout the particular year.

(A)What criteria does Revenue Canada use to determine whether there is a reasonable expectation of profit?

(B)Would transactions which are out of the normal course of business be included in the determination of whether there is a reasonable expectation of profit?

Department's Position

(A)The Department has not developed any specific guidelines as to what constitutes a "reasonable expectation of profit" for the purposes of subsection 111(5) of the Act. Whether or not a business is carried on with a reasonable expectation of profit throughout a particular year can only be determined following a review of all of the facts relating to a particular case. However, the courts have often dealt with the meaning of the term "reasonable expectation of profit" and, in particular, we would refer you to the general principles laid down by Justice Dickson, as he then was, of the Supreme Court of Canada in the case William Moldowan v. The Queen, 77 DTC 5213 wherein he stated at p. 5215:

"In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews (1974), 28 (Sic,74) DTC 6193.".

(B)Generally, the Department would only look at the normal operations of a business in determining whether that business was carried on with a reasonable expectation of profit throughout the particular year. Again, it would be a question of fact as to whether or not a particular transaction was carried out in the normal course of a business.

Author:M. Sarazin
File:941028
Date:April 21, 1994