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.
RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY
Principal Issues:
1.WHETHER THE DEEMING RULE OF PARAGRAPH 22(1)(c) APPLIES TO ALLOW A RESERVE UNDER PARAGRAPH 20(1)(l) FOR DEBTS ARISING FROM LOANS THAT WERE NOT ACQUIRED IN THE ORDINARY COURSE OF A MONEY-LENDING BUSINESS OF THE PURCHASER.
2.WHETHER AN ELECTION IS AVAILABLE UNDER SECTION 22 WHERE THE ASSETS USED IN CARRYING ON THE VENDOR'S BUSINESS ARE ACQUIRED BY A NUMBER OF PURCHASERS.
Position TAKEN:
1.YES, UNDER SUBPARAGRAPH 20(1)(l)(i) only.
2.NO
Reasons FOR POSITION TAKEN:
1.WHERE THE CONDITIONS OF THE PREAMBLE TO SUBSECTION 22(1) ARE APPLICABLE, FOR THE PURPOSE OF PARAGRAPH 20(1)(l) & (p), PARAGRAPH 22(1)(c) DEEMS THE AMOUNT OF THE DEBTS ARISING FROM LOANS (NOTE: LENDING ASSETS AS DEFINED IN SUBSECTION 248(1) WOULD NOT BE INCLUDED) MADE IN THE COURSE OF THE VENDOR'S BUSINESS TO HAVE BEEN INCLUDED IN THE PURCHASER'S INCOME, A CONDITION ESSENTIAL TO THE CLAIMING OF A RESERVE UNDER SUBPARAGRAPH 20(1)(l)(i). HOWEVER, THE PURCHASER WOULD NOT BE ABLE TO CLAIM A RESERVE UNDER SUBPARAGRAPH 20(1)(l)(ii) SINCE THE LOANS WERE NOT ACQUIRED BY THE PURCHASER IN THE ORDINARY COURSE OF HIS BUSINESS OF LENDING MONEY.
2.SUBSECTION 22(1) REQUIRES THAT A VENDOR SELL ALL OR SUBSTANTIALLY ALL OF THE PROPERTY USED IN A BUSINESS, INCLUDING THE DEBTS AND LOANS, TO A PURCHASER WHO PROPOSES TO CONTINUE THAT BUSINESS. IN OUR VIEW THAT REQUIREMENT WOULD NOT BE MET WHERE ASSETS ARE SOLD PIECEMEAL OR PORTIONS OF THE BUSINESS ARE SOLD TO A NUMBER OF PURCHASERS.
941020
XXXXXXXXXX G. Donell
Attention: XXXXXXXXXX
July 13, 1994
Re: Subsection 22(1) and subparagraph 20(1)(l)(ii) of the Income Tax Act (the "Act")
This is in reply to your letter of April 14, 1994 in which you have requested our interpretation as to the application of section 22 and paragraph 20(1)(l) of the Income Tax Act, S.C.1970-71-72, c.63 as amended consolidated to June 10, 1993.
You have correctly stated that in circumstances where a purchaser acquires the business of a vendor, including debts and loans, and such transaction is not in the ordinary course of the business of the purchaser, that purchaser would not be entitled to claim a reserve pursuant to subparagraph 20(1)(l)(ii) of the Act. If the purchaser and the vendor file an election pursuant to section 22 of the Act the debts and loans so acquired would be deemed to have been included in computing the purchaser's income for purposes of paragraphs 20(1)(l) and (p) of the Act pursuant to paragraph 22(1)(c) of the Act. Accordingly it is our view, in such circumstances, that the purchaser would be entitled to claim a reserve to the extent that the collection of such debts and loans are doubtful pursuant to subparagraph 20(1)(l)(i) of the Act.
We would note that the election pursuant to section 22 of the Act and therefore the entitlement to a reserve pursuant to subparagraph 20(1)(l)(i) of the Act relates only to debts arising from loans made in the ordinary course of the vendor's business and therefore would not apply to "lending assets" as defined in subsection 248(1) of the Act.
An election pursuant to section 22 is only available where a vendor has sold all or substantially all of the property used in carrying on its business to a purchaser who proposes to continue to carry on that business. Accordingly, given the requirements that the purchaser continue to carry on the business of the vendor, it is our view that an election under section 22 would not be available where parts of the business or assets of the business are acquired by a number of purchasers.
While we trust that our comments are of assistance to you, we would advise that they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department in respect of any particular situation.
for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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