23 September 1999 External T.I. 9924355 - BANKRUPTCY & CARRYFORWARD OF LOSSES

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: Where a corporation has become a bankrupt and has its bankruptcy annulled because of a proposal accepted by creditors, does the bankruptcy, in and of itself, result in the cessation or change of the Loss Business for purposes of subsection 111(5).

Position: No

Reasons: Subsection 128(1)(a) deems the trustee in bankruptcy to be the agent of the bankrupt for all purposes of the Act, and, as a result, the business activities carried on by the trustee in respect of the estate of the bankrupt are considered to be the business activities of the bankrupt corporation. Thus, where an absolute order of discharge has not been granted, paragraph 111(5)(a) will not apply to prohibit the carryforward of noncapital losses of the bankrupt on an acquisition of control of the bankrupt provided that the conditions in subsection 111(5) are satisfied.

992435
XXXXXXXXXX T. Lanzer
(613) 957-2129

Attention: XXXXXXXXXX

September 23, 1999

Dear Sirs:

Re: Subsection 111(5) of the Income Tax Act - Bankruptcy of a Corporation

We are writing in response to your letter of September 7, 1999 wherein you requested our interpretation of the effect of a bankruptcy (where no absolute order of discharge is granted) on the continuation of the business of the bankrupt corporation.

You have noted that where there has been an acquisition of control of a corporation (including one whose bankruptcy was annulled), paragraph 111(5) (a) of the Income Tax Act (the "Act") will prohibit the carryforward of non-capital losses unless the business in which the loss was incurred (the "Loss Business") continues to be carried on throughout the relevant taxation years for profit or a reasonable expectation of profit. In your view, whether the Loss Business continues to be carried on after the acquisition of control depends on whether the bankruptcy, in and of itself, results in the cessation or change of the Loss Business.

You are concerned about a situation where a corporation has become a bankrupt and has its bankruptcy annulled because of a proposal accepted by creditors, and have asked us to confirm that the bankruptcy, in and of itself, will not result in the cessation or change of the Loss Business for purposes of subsection 111(5).

You suggest that this conclusion is supported by paragraph 128(1)(a) which deems the trustee in bankruptcy to be the agent of the bankrupt for all purposes of the Act, and, as a result, the business activities carried on by the trustee in respect of the estate of the bankrupt are considered to be the business activities of the bankrupt corporation.

Our Comments

Where a corporation has become a bankrupt, subsection 128(1) of the Act states that:

(g)where an absolute order of discharge is granted in respect of the corporation, for the purposes of section 111 any loss of the corporation for any taxation year preceding the year in which the order of discharge was granted is not deductible by the corporation in computing its taxable income for the taxation year of the corporation in which the order was granted or any subsequent year.

We therefore agree that where an absolute order of discharge has not been granted, paragraph 111(5)(a) will not apply to prohibit the carryforward of non-capital losses of the bankrupt on an acquisition of control of the bankrupt provided that the conditions in subsection 111(5) are satisfied. Moreover, we agree that an assignment in bankruptcy, in and of itself, will not result in the cessation or change in the nature of the business activities formerly carried on by the bankrupt, where the activities of the corporation are carried on by the trustee in bankruptcy as agent for the bankrupt.

We would also note that in determining the impact of section 111 on the carryforward of non-capital losses in a bankruptcy situation, consideration should also be given to the impact of the debt forgiveness rules found in section 80 of the Act.

In accordance with paragraph 22 of Information Circular 70-6R3, the opinions expressed in this letter are not income tax rulings and are, therefore, not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch