20 October 1989 Income Tax Severed Letter AC58667 - GAAR and Misuse or Abuse 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.

5-8667
                  19(1)             J.E. Harms
                                    (613) 957-2109
OCT 20 1989

Dear Sirs:

Re: Subsection 245(2) Utilization of losses

This is in reply to your reply letter of September 11, 1989 in which you requested our views on the potential application of subsection 245(2) of the Income Tax Act (Canada) (the "Act") in the following hypothetical fact situation:

 1.      A Canadian private corporation ("Corp X") has
         non-capital loss carryforwards which will commence to
         expire on December 31, 1990.

 2.      Late in 1989 Corp X sells capital property to its
         subsidiary at fair market value. In so doing Corp X
         recognizes a taxable capital gain which, since the
         disposition occurs in its 1989 taxation year (rather
         than in 1990 or later), is equal to 2/3 (rather than
         3/4) of the capital gain realized on the disposition.

Your first question is whether the sale of the asset by Corp X to its subsidiary in order to utilize the loss carryforward of Corp X would be subject to the application of subsection 245(2) of the Act.

In our opinion the sale of a capital asset by a corporation with a loss carryforward to a related corporation, although it might constitute an "avoidance transaction" within the meaning assigned by subsection 245(3) of the Act, would ordinarily not, in and by itself, be considered to result in a misuse of any provision of the Act or an abuse having regard to the provisions of the Act read as a whole and would thus be exempt from the application of subsection 245(2) by virtue of subsection 245(4). However, the determination of whether a particular transaction is an avoidance transaction or whether it qualifies for the exemption in subsection 245(4) can only be made upon an examination of all of the relevant facts and circumstances. For instance, if the transfer of the asset were undertaken to avoid a specific rule, such as a rule designed to preclude the deduction of losses after the acquisition of control of a corporation by an arm's length person, such a transfer would be considered a misuse of the provisions of the Act and be subject to subsection 245(2).

Your second question is whether the fact that the capital gain is realized in 1989 (rather than after 1989) when the taxable portion of the capital gain is 2/3 (rather than 3/4) would be subject to the application of subsection 245(2).

In our opinion, while arranging the timing of the asset sale to realize the gain in 1989 might constitute an "avoidance transaction", it would ordinarily not, in and by itself, be considered to result in a misuse of any provision of the Act or an abuse having regard to the provisions of the Act read as a whole. However, as indicated above, each transaction must be considered in light of all the facts and circumstances relating to the particular transaction in order to determine whether subsection 245(2) is applicable.

The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 24 of Information Circular 70-6R dated December 18, 1978 and are not binding on the Department.

Yours truly,

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