24 March 1997 Internal T.I. 9705947 - LOSSES, MEANING OF "SIMILAR", MINING PROPERTIES

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:

whether tin and uranium are similar properties for 111(5)

Position: yes

Reasons:

meaning of "similar", past interpretations by Rulings

March 24, 1997

TORONTO TAX SERVICES OFFICE Resource Industries Section
Verification & Enforcement Division Denise Dalphy
(613) 957-9231
Attention: Gino Cappella
970594

XXXXXXXXXX and subsection 111(5) of the Income Tax Act (the "Act")

This is in reply to your memorandum of February 27, 1997, concerning the above-referenced taxpayer and the utilization of losses pursuant to subsection 111(5) of the Act.

FACTS

Our understanding of the facts is as follows:

XXXXXXXXXX

ISSUE

Does subsection 111(5) of the Act preclude XXXXXXXXXX from deducting the pre-change of control subsection 111(5.1) non-capital losses of XXXXXXXXXX (the "111(5.1) losses") from its income in XXXXXXXXXX from its uranium and other mining operations?

OUR COMMENTS

Based on the information provided, subsection 111(5) of the Act will not prevent XXXXXXXXXX from reducing its XXXXXXXXXX income from its uranium, tin, potash, copper and coal mines by the 111(5.1) losses.

"Property (ies)"

The word "properties" in subsection 111(5) of the Act must be interpreted in accordance with the definition of "property" in subsection 248(1) of the Act. Subsection 248(1) defines "property" as follows:

"property" means property of any kind whatever (emphasis added) whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action,
(b) unless a contrary intention is evident, money,
(c) a timber resource property, and
(d) the work in progress of a business that is a profession;

The definition of property in subsection 248(1) of the Act is an expansive, not a restrictive, one. It does not in any way restrict the common law meaning of the word "property", which is a very broad concept and denotes anything that is the subject of ownership. There is no doubt that the word "properties" in subsection 111(5) of the Act includes goods or products, including tin and uranium.

Same Business/ Similar Business

Subparagraph 111(5)(a)(ii) of the Act allows for a deduction to the extent of the corporation's "income for the particular year from that business". We agree with you that there must be a degree of interconnection or interdependency between business operations for those operations to be considered as one business. There is absolutely no information before us that would indicate that the tin mining operations were operated as part of the same business as the uranium and other mining interests of XXXXXXXXXX.

However, subparagraph 111(5)(a)(ii) also permits a deduction "from any other business" if "substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services". The Department has previously opined that income derived by a corporation that carried on a business of extracting, processing and selling uranium and income derived by a corporation that carried on a business of extracting, processing and selling gold were considered to be from the sale of similar properties for the purposes of subparagraph 111(5)(a)(ii) of the Act, since uranium and gold are both "minerals" within the meaning of subsection 248(1) of the Act. The Department has also taken the same position regarding subparagraph 111(5)(a)(ii) of the Act with respect to metallurgical coal and other metals (such as base and precious metals). The same logic would apply in this case. Accordingly, tin and uranium should be interpreted as being "similar properties"; that is, tin and uranium are properties of the same general nature or character, for the purposes of subsection 111(5) of the Act. Of course, whether "substantially all" the income of XXXXXXXXXX uranium business is from the sale of uranium is a question of fact. However, barring unusual circumstances, one would expect this to be the case with a mining operation.

The extension of the deduction of the non-capital losses of a corporation from income from the same business to income from another business ("substantially all the income of which was derived from the sale ... of similar properties...") is available only:

"where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before..." (the change of control).

Although this issue too is a question of fact, one would expect that if tin was mined by the business, that, barring unusual circumstances, the tin was also sold by it.

Finally, subparagraph 111(5)(a)(i) does not appear to be at issue in this situation. However, it is curious that the tin mine was acquired in XXXXXXXXXX, operated at a loss for three years and then closed XXXXXXXXXX. Was the tin mine really operated during that time with a reasonable expectation of profit as required by subparagraph 111(5)(a)(i)? Was the magnitude of the losses acquired by XXXXXXXXXX such that it can reasonably be considered that the business of XXXXXXXXXX was acquired for its non-capital losses rather than for the purposes of operating that business with a reasonable expectation of profit?

Please contact the writer if we may be of further assistance.

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch