Principal Issues: 1. Whether the restrictions in subsections 88(1.1) or 111(5) would apply in the situations described? 2. Whether subsection 69(11) would apply in the situations described?
Position: 1. No. 2. No.
Reasons: 1. No acquisition of control because of subparagraph 256(7)(a)(i). 2. No disposition of property after the winding-up or amalgamation.
XXXXXXXXXX 2005-015243 R. Gagnon February 2, 2006
Dear Sir,
Subject: Deductibility of non-capital losses
This is in response to your facsimile of September 27, 2005, in which you asked us about the application of certain provisions of the Income Tax Act to the situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Facts and assumptions
1. Lossco and Profitco are "taxable Canadian corporations" as defined in subsection 89(1) and "Canadian-controlled private corporations" as defined in subsection 125(7).
2. Ms. A, Ms. B, Mr. C and Mr. D are individuals resident in Canada for the purposes of the Act. Ms. A, Ms. B, Mr. C and Mr. D are siblings.
3. Ms. A owns all of the issued and outstanding shares of the capital stock of Lossco. Ms. A has always had legal (de jure) control of Lossco for the purposes of the Act. Ms. A has always been the sole shareholder of Lossco.
4. The issued and outstanding shares of the capital stock of Profitco consist solely of common shares. Ms. A, Ms. B, Mr. C and Mr. D each own 25% of the issued and outstanding common shares of the capital stock of Profitco.
5. Ms. A, Ms. B, Mr. C and Mr. D together form a group of persons who have legal control of Profitco for the purposes of the Act.
6. In its taxation year that ended in 2005, Lossco disposed of all of the property that was used in its business to a person with whom Lossco was dealing at arm's length within the meaning of subsection 251(1). Lossco is now an inactive corporation and no longer carries on a business. Its assets consist solely of cash.
7. Lossco has unutilized non-capital losses (as defined in subsection 111(8)) totalling $200,000.
8. Profitco operates a transport services business and regularly makes a profit.
9. The following transactions would be carried out by the parties. First, Ms. A would dispose of all of her Lossco shares to Profitco, for cash consideration equal to the fair market value of her Lossco shares. There would then be an acquisition by Profitco of legal control of Lossco for the purposes of the Act, without regard to subsection 256(7).
10. Immediately thereafter, Lossco and Profitco would amalgamate, or Lossco would be wound up into Profitco. Any such amalgamation would be an "amalgamation" within the meaning of section 87(1). The amalgamated corporation would be Amalco. Any wind-up would be a subsection 88(1) wind-up. If Lossco is wound up, the corporation would be dissolved shortly after the winding-up.
11. In the event of the winding-up of Lossco, Profitco would intend to deduct Lossco's non-capital losses transferred to Profitco, in computing its taxable income pursuant to paragraph 111(1)(a), to the extent of its net income attributable to its transport services business.
In the event of an amalgamation of Lossco and Profitco, Amalco would intend to deduct Lossco's non-capital losses in computing its taxable income pursuant to paragraph 111(1)(a) to the extent of its net income attributable to its transport services business.
12. In your view, the only purposes of the transactions described in paragraphs 9 to 11 above, would be to enable Profitco or Amalco, as the case may be, to utilize Lossco's non-capital losses, and in the case of Ms. A to realize the fair market value of her Lossco shares.
13. Section 69(11)(b) would not apply to the situation described above.
Your Questions
1. Would subsection 69(11) apply in the situation described above in the event of the amalgamation of Profitco and Lossco or the winding-up of Lossco, as the case may be, as a result of the use by Amalco or Profitco of Lossco's non-capital losses?
2. Would Amalco or Profitco, as the case may be, be able to deduct Lossco's non-capital losses in computing its taxable income in the event of an amalgamation or winding-up respectively, in the situations described above?
3. Would the Canada Revenue Agency ("CRA") apply the general anti-avoidance rule ("GAAR") in section 245 to deny the use by Amalco or Profitco, as the case may be, of the non-capital losses of Lossco?
Our Comments
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The CRA does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received the appropriate tax treatment. We can, however, offer the following general comments which may not apply in full to the situations submitted.
Question 1
Whether section 69(11) is applicable in a particular situation is a question of fact that can only be determined after an examination of all the relevant facts surrounding a particular situation. Consequently, we do not believe that it is appropriate to make a definitive ruling on a request for interpretation as to whether section 69(11) might be applicable in the situations described above.
However, it appears to us that in a situation as described above, which would involve the winding-up of the corporation that has realized non-capital losses, subsection 69(11) could not apply if no property was disposed of for proceeds of disposition less than its fair market value in the series of transactions or events.
Furthermore, as provided in subsection 69(13), where there is an amalgamation of two corporations to form a new corporation, each property of the corporation that becomes property of the new corporation as a result of the amalgamation or merger is deemed, for the purpose of determining whether subsection 69(11) applies to the amalgamation or merger, to have been disposed of by the corporation immediately before the amalgamation or merger for proceeds equal to the cost amount (or nil, in the case of a Canadian resource property or a foreign resource property) to the corporation of the property immediately before the amalgamation.
In a situation as described above, involving the amalgamation of a profitable corporation with another corporation that has realized non-capital losses, subsection 69(11) could apply if one of the main purposes of the series of transactions or events was to apply the non-capital losses against net income from the disposition of property after the amalgamation (for example, the property disposed of could be inventory, vehicles or real property) that was owned by the profitable corporation immediately before the amalgamation (provided that the disposition of such property is made, or arrangements for such disposition are made, before the day that is three years after the time that is immediately before the amalgamation). On the other hand, it appears to us that subsection 69(11) would not apply if the sole purpose of the series of transactions or events was to apply non-capital losses against the net income of the new corporation arising solely from services rendered by the new corporation and, in particular, did not involve any disposition of property acquired by the new corporation on the amalgamation.
Question 2
In the situations described above, it appears to us that there would be no acquisition of legal control of Lossco by any person or group of persons as a result of the series of transactions or events. In particular, there would be no acquisition of control of Lossco by virtue of the application of subparagraph 256(7)(a)(i).
Consequently, it appears that the restrictions in paragraph 88(1.1)(e) and subsection 111(5) on the use of non-capital losses would not apply.
Question 3
The CRA does not normally comment on the application of section 245 in the context of an interpretation request. Accordingly, we are unable to comment on the application of section 245 to the situations described above.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is not binding on the Canada Revenue Agency in respect of any particular factual situation.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch