11 January 1990 Income Tax Severed Letter AC59152 - Acquisition of Control of Corporation

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.

5-9152
             19(1)                         S. Shinerock
                                           (613) 957-2108

JANUARY 11, 1990

Dear Sirs:

Re: Subsection 111(5) of the Income Tax Act (the "Act")

We refer to your letter of November 21, 1989 in which you requested our views on the application of subsection 111(5) of the Act where control of a corporation is acquired by another corporation in the circumstances envisaged below.

A taxable Canadian corporation ("Canco A") operates a business of a wholesaler and derives its revenue therefrom by distributing widgets to retail outlets. Another taxable Canadian corporation ("Canco B"), is one of Canco A's retail customers and derives all or substantially all of its income from the sale.of widgets. Taxable Canadian corporation has the meaning assigned by paragraph 89(l)(i) of the Act. Canco A and Canco B are not related corporations within the meaning set out under subsection 251(2) of the Act. Canco B has incurred significant non-capital losses, within the meaning assigned by paragraph lll(8)(b) of the Act, from the operation of its retail widget business carried on out of a single location.

Canco A intends to acquire all of the issued and outstanding shares of Canco B mainly for reasons that are not tax related, and which include the maintenance of Canco A's retail customer base. Subsequent to the acquisition, Canco A will either amalgamate with Canco B pursuant to subsection 87(l) of the Act, or wind up Canco B pursuant to subsection 88(l) of the Act. You wish to know, whether, in the Department's view the widget wholesale business of Canco A and the widget retail business of Canco B would be "the same or a similar business" for the purposes of subsection 111(5) and subsection 88(1.1) of the Act. You also ask the same question if the assumed facts described above are varied such that Canco B carries on business out of two retail locations instead of one, and both stores have incurred losses. Following the acquisition of Canco B in the manner described herein, Canco A will close down one of the two locations and will carry on the former retail business of Canco B out of the other location.

Opinions

It appears your request may relate to a specific proposed transaction. Confirmation of the tax consequences of a specific proposed transaction will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 7O-6R. We are, however, able to provide the following general comments in response to your enquiry.

In the first instance, we would point out that it is a question of fact whether a business is carried on by a corporation for profit or with a reasonable expectation of profit throughout a particular taxation year for the purposes of subparagraph 111(5) (a)(i) or subparagraph 88(1.1)(e)(i) of the Act, and this, we make no comment. However, assuming that the former retail business of Canco B is carried on with a reasonable expectation of profit, we are of the view that the widget wholesale business would be considered to be a business substantially all of the income of which was derived from the sale ... of similar properties ..." for the purposes 1of subsections 111(5) and 88(1.1) of the Act. Here, we would add a caution that, in regard to the second situation envisaged by you, the former retail business of Canco B carried on through the remaining stole would have to have a significant business activity. Otherwise, we would not consider that "... that business was carried on ...", with the result that Canco A would not be able to deduct the non-capital losses of Canco Bin computing its taxable income under Part 1 of the Act. In accordance with paragraph 24 of Information Circular 70-6R, the views expressed herein do not constitute advance income tax rulings and consequently, are not binding on the Department.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch