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.
Principal Issues:
What guidelines are used in determining if businesses in service industry are similar?
Position:
Q of F
Reasons:
Similar is given a broad interpretation but where service industry is concerned they have to be in the same service industry.
962781
XXXXXXXXXX M.P. Sarazin
October 17, 1996
Dear Sirs:
Re: Determination of Similar Business
This is in reply to your facsimile dated August 21, 1996, wherein you requested our Department's views with respect to the determination of whether two businesses in the service industry are similar. In addition, you requested copies of any guidelines/criteria issued by the Department regarding such determination and references to any relevant case law dealing with the issue.
A review of previous decisions in this area indicated that specific guidelines have not been established for determining whether two businesses in a service industry are similar. We have also confirmed with a representative from the Verification, Enforcement & Compliance Research Branch of Revenue Canada that there are no written guidelines/criteria for determining whether two businesses in a service industry are similar. In determining whether two businesses in a service industry are similar, the facts in each case are reviewed in light of the comments provided in Interpretation Bulletins IT-206R, IT-259R2 and IT-491.
The expression "similar business" appears in subsection 13(4.1) and paragraph 44(5)(b) of the Income Tax Act (the "Act"). In addition, paragraph 111(5)(b) of the Act makes reference to an expression "similar services". Unfortunately, the word "similar" can have different meanings depending on the context in which it is used. In interpreting the word "similar" for purposes of applying the Act, we have relied on the following passage from Barnwell Consolidated School District No. 15 v. Canadian Western Natural Gas, Light, Heat & Power Co. :
"It is, of course, rather strange that rights or obligations with respect to taxation should be made to depend upon a question of "similarity" for there are undoubtedly varying degrees of similarity. For this reason it is obviously difficult to decide what exactly is intended by the expression. The choice ranges from the one extreme of saying that it means "exactly alike" or "similar" in the sense of being completely the same, or to the other extreme of saying that it would apply wherever there is any quality of likeness at all, although all other qualities or elements in the tax may be quite unlike. In my opinion, however, the proper way to interpret the expression is to treat it as meaning "of the same general nature or character". In this way, I think that we avoid both the extremes to which I have referred and we ought, I also think, to avoid them, for clearly neither would be proper to adopt."
A subsequent legal opinion from the Department of Justice confirmed that, in the context of subsection 111(5), it is appropriate to interpret "similar" as meaning "of the same general nature or character". Based upon this interpretation, paragraph 20 of IT-259R2 states that "the Department will interpret "similar business" in a reasonably broad manner. However, the Department's position that it will interpret the phrase "similar business" in a reasonably broad manner only applies where two businesses belong to the same service industry.
We have reviewed our files with respect to positions previously taken regarding similarity of properties or services. The positions are as follows:
(a) Systems software is similar to applications software, but neither is similar to computer hardware.
(b) Trucking of sand and gravel is similar to trucking of poultry and lumber.
(c) Mining and sale of metallurgical coal is similar to the mining and sale of other minerals.
(d) The operation of a hotel which includes a restaurant and lounge is similar to the operation of a restaurant and lounge.
(e) The operation of a hotel or motel with no restaurant, the operation of a restaurant, and the operation of a hotel or motel with a beverage room but no separate restaurant would be considered businesses similar to the operation of a hotel with a restaurant.
(f) A prime rib restaurant is similar to a steak restaurant (even where the latter is operated in conjunction with a hotel).
(g) The sale of fast-food chicken is similar to the sale of fast-food fish.
(h) Staging of musical concerts in a stadium is similar to staging professional football, each being a kind of live entertainment.
(i) Security equipment (including locks, fire detection equipment, intruder alarms, safes and fire-resistant cabinets and closed-circuit television) is similar to electro-magnetic labels developed for use in libraries, hospitals and retails establishments.
(j) The manufacture of parts and major components for aircraft is similar to the design, manufacture and sale of aircraft.
(k) The construction of single-family residences is not similar to the construction of residential or commercial rental buildings.
(l) The leasing of land is not similar to the development and sale of land.
(m) Structural steel is not similar to plastic and concrete sewer pipes.
(n) Farm equipment is not similar to cars and trucks sold by a Ford dealer.
(o) A funeral business is not similar to a hotel/tavern business.
(p) The operation of a senior citizens home is not similar to the operation of a restaurant and tavern.
We trust the above comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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