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.
February 20, 1997
Winnipeg Tax Services Office HEADQUARTERS
Client Services Division B. Kerr
957-8953
Attention: Henry Zerbin
963707
Similar Business
This is in response to your letter of November 5, 1996, concerning the term "business" under subsection 34.2(3) of the Income Tax Act (the "Act") for the purpose of claiming a reserve under subsection 34.2(4) in respect of December 31, 1995 income.
We understand that a particular taxpayer sold his accounting practice. The sale agreement stipulates that the taxpayer is not allowed to engage in an accounting business. Immediately subsequent to the disposition, the taxpayer commenced a financial planning business offering financial planning services, selling mutual funds and life insurance, and the preparation of income tax returns.
You have requested our views on whether these two businesses would be considered similar. You have also asked us whether there is any reference material available that may be referred to for assistance in determining whether two businesses would be considered similar.
The Department's views on the interpretation of the term "similar business" are outlined in paragraph 17 to 20 of Interpretation Bulletin IT-259R2. Interpretation Bulletin IT-206R, entitled "Separate businesses" provides comments for the purpose of determining whether a taxpayer is carrying on one business or more than one and includes comments in paragraphs 4 and 5 thereof concerning situations where one business operation succeeds another. However, it should be noted that: IT-259R2 mainly deals with the rules concerning replacement property; IT-206R is primarily focused on the determination of whether the two operations are the same business; and the words "similar business" are not used in either subsections 34.2(3) or 34.2(4) of the Act.
In order for an individual to claim the reserve under subsection 34.2(4) of the Act, by virtue of subparagraph 34.2(6)(c)(i), the business must be carried on by the individual at the beginning of the year. For this purpose, subsection 34.2(3) provides that a reference to a particular business of a taxpayer includes another business substituted therefor by the taxpayer where: all or substantially all of the gross revenue of the particular business is derived from the rendering of services; and all or substantially all of the gross revenue of the other business is derived from the rendering of similar services.
The term "similar" is not defined in the Act. The sixth edition of Blacks Law Dictionary provides the following:
"Similar. Nearly corresponding; resembling in many respects; somewhat like; having a general likeness, although allowing for some degree of difference. Word "similar" is generally interpreted to mean that one thing has a resemblance to in many respects, nearly corresponds, is somewhat like, or has a general likeness to some other thing but is not identical in form and substance, although in some cases "similar" may mean identical or exactly alike. It is a word with different meanings depending on context in which it is used."
The wording in subparagraphs 111(5)(a)(ii) and 111(5)(b)(ii) is similar to that in paragraphs 34.2(3)(a) and (b) of the Act.
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This is reflected in paragraph 14 of Interpretation Bulletin IT-302R3, dealing with losses of a corporation, which also states "However, a determination of the similarity of properties sold, leased, rented or developed and services rendered in two or more businesses for the purposes of paragraph 111(5)(a) or (b) is primarily a question of fact that can only be answered having regard to all the relevant facts and circumstances in each case."
The examples found in paragraph 15 of IT-302R3 may be of assistance in resolving other situations that you may encounter. However, since the examples do not involve accounting or financial planning, we have considered the meaning of such terms as "accounting", "accountant", "finance", "financial" and "financial institution" as well as the types of services normally offered by an accountant. Although it is a question of fact, in our view, it is unlikely that the services of a financial planner would be considered to be similar to those of an accountant. In any event, in your particular case, the fact that the taxpayer is precluded from providing accounting services would also appear to prevent the taxpayer from meeting the all or substantially all test.
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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