1 June 1982 Income Tax Severed Letter

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.

J.F. Oulton (613) 995-1787

JUN 1 1982

Dear Sirs:

This is in reply to your letter dated March 26, 1982 wherein you requested an interpretation in the following hypothetical situation:

A corporation (X Co.) resident and incorporated in the United Kingdom (U.K.) is in receipt of income from a business carried on entirely within the U.K. The business operations of the corporation incur a loss in 1981 as computed for U.K. tax purposes, which would also be a loss if computed for Canadian purposes.

During 1982, the sole shareholders and the directors of this corporation (Mr. & Mrs. X) became resident in Canada. The shareholders of the corporation however do not alter. Prior to this move the U.K. business operations of the corporation cease. The corporation then becomes resident in Canada during 1982 by virtue of its mind and management being with Canada - i.e. directors resident in Canada, directors' meetings held in Canada, shareholders' meetings to be held in Canada etc. After becoming resident in Canada, the corporation will receive income from property arising from term deposits and similar investments.

You have asked us to confirm your view that the loss sustained by X Co. from its U.K. operations while it was resident in the U.K., would be an available non-capital loss for Canadian income tax purposes.

We are not in agreement with your interpretation. It is our view that the loss would not be available and offer the following comments in support of our position:

(1) Both the preamble to the definition of a non-capital loss in paragraph 111(8)(b) and the "loss" in subparagraph 111(8)(b)(i) make reference to a taxpayer. X Co. could not be regarded as a taxpayer under Part I of the Act since it is not liable for tax in Canada pursuant to subsection 2(2) and 2(3) of the Act and hence would have no income (or loss) pursuant to section 115.

We feel our view is supported in principle by the Supreme Court of Canada in the Lea-Don Ltd. case (70 DTC 6271). It was argued that the subsection in question was applicable where the transferee was a non-resident person who was not carrying on business in Canada and so not liable to assessment under Part I of the Act. Mr. Justice Hall rejected that argument when he stated at page 6274:

"It is clear that s. 20(4) is concerned with taxpayers entitled to a deduction, not with persons who are not subject to assessment under Part I. A non-resident not carrying on business in Canada is not a person entitled to such a deduction and therefore s. 20(4) cannot properly be said to be "applicable" to him."

In summary therefore it is our view that a "taxpayer" must be a person subject to the jurisdiction of the Income Tax Act, although he might not be liable for tax.

(ii) The loss is for a "taxation year" under paragraph 111(8)(b), which X Co. would not have for Canadian income tax purposes. This is so since a "taxation year" is a "fiscal period" by virtue of paragraph 249(1) (a) and a fiscal period is defined as "the period for which the accounts of the taxpayer have been ordinarily made up and accepted for purposes of assessment under this Act"...etc.

You have refuted the above interpretation by referring to subsection 152(1.1) contending that X Co. still could have a taxation year if the taxpayer later made a request to the Minister for a determination thereunder.

It would be our contention firstly, that no amount was ever reported as a loss by X Co. for purposes of assessment under the Canadian Income Tax Act and secondly, this would be proper since the Company did nothing to come within the purview of our Act in 1981.

Yours truly,

for Director Corporate Rulings Directorate Legislation Branch

JFO/1c

Act : 2(3) 115(1) 111(8)(b) 111(8)(c) 249(1)(a) 152(1.1)