5-902248
Dear Sirs:
Re: Request for Technical Interpretation Subsection 115(4) and Section 66.7 of the Income Tax Act (the "Act")
Your letter dated July 27, 1990 requests our comments with respect to the above-mentioned provisions of the Act in relation to certain hypothetical transactions described herein.
Hypothetical Transactions
You have described the hypothetical transactions as follows:
1. A U.S. corporation which is not resident in Canada ("NR Co.") carried on an oil and gas business in Canada with a December 31 fiscal year-end.
2. On June 30, 1989 NR Co. disposed of all of its Canadian oil and gas properties to an arms-length Canadian resident corporation ("Can Co") for proceeds of $1,000,000.
3. NR Co. maintained an office and employees in Canada until September 30, 1989 in order to complete with accounting for and administration of the oil and gas business transactions which occurred prior to the disposition.
4. At the time of disposition, NR Co, had balances of cumulative Canadian oil and gas property expense ("CCOGPE") of $500,000 and cumulative Canadian development expense ("CCDE") of $1,000,000.
5. NR Co. and Can Co. jointly elected pursuant to subsection 66.7(7) of the Act in order for the successor corporation rules of section 66.7 of the Act to apply.
Your Questions and Your Views
1. When would NR Co. be considered to have ceased to have carried on its oil and gas business in Canada for purposes of the deemed year-end provisions of paragraph 115(4)(a) of the Act?
It is your view that since the maintenance of an office and employees until September 30, 1989 was maintained for the accounting and administration of disposition of the assets which were used in NR Co's oil and gas business, it would appear to be reasonable that the Canadian oil and gas business of NR Co. did not cease immediately upon disposition of the Canadian oil and gas properties but rather that the business continued until September 30, 1989, or failing that, until some time after the date of disposition of the oil and gas properties, i.e., after June 30, 1989.
2. What amount of CCDE would be transferred from NR Co. to Can Co. as a result of the successor corporation election?
It is your view that:
A. Where NR Co's deemed year-end is subsequent to the date of disposition of its oil and gas properties, the CCDE at the time of disposition ($1,000,000 would be transferred to Can Co. without any reduction for negative CCOGPE arising from the disposition because the effective time of transfer of the successor balance of CCDE is immediately after the disposition under clause 66.7(4)(a)(i)(A) and paragraph 66.7(12)(c) whereas the transfer of negative CCOGPE to CCDE takes place at the end of the taxation year under subparagraph 66.2(5)(b)(x) and subsection 66.4(1)
Thus, you conclude that if NR Co.'s deemed year-end pursuant to paragraph 115(4) of the Act is any time after the disposition on June 30, 1989, the full balance of CCDE of $1,000,000 would be available to Can Co. for deduction under the successor corporation rules.
B. Where NR Co. is deemed to have a year-end at the time of disposition of its Canadian oil and gas properties, i.e., on June 30, 1989 you state:
A successor corporation may deduct an amount in respect of CCDE of the predecessor determined immediately after the disposition of the property (subsection 66.7(4). CCDE at any time (ie. immediately after the disposition) is reduced by negative CCOGPE in respect of taxation years ending at or before that time (subparagraph 66.2(5)(b)(x). Negative CCOGPE in respect of a taxation year is determined based on amounts at the end of the year (subsection 66.4(1). CCOGPE at any time (ie. at year end which coincides with the time of disposition) is reduced by proceeds from disposition of properties before the time (subparagraph 66.2(5)(b)(v).
Based on the above provisions, it would appear that CCOGPE in respect of a taxation year would be reduced by proceeds from disposition of properties prior to the year end but would not be reduced by proceeds from disposition of properties simultaneously with the year end (ie. reduction in respect of dispositions before the time of computation). If this is the case, the CCDE balance of NR Co. would not be reduced prior to the effect of the Can. Co. successor election since it would not have a negative CCOGPE amount for a taxation year ending at or before the time that was immediately after the time of disposition.
Our Comments
Our comments to your questions and your views are as follows.
Question 1
Paragraph 2 of Information Bulletin IT 313R states:
Whether a taxpayer has "ceased to carry on a business" is determined on the facts of each case. Generally, where the normal business activities have ceased and there is little likelihood of the business starting up again in the near future, business is considered to have ceased.
Consequently, whereupon the examination of all of the relevant facts pertaining to NR Co. reveals that NR Co. continued its normal Canadian oil and gas business activities, such as but not limited to the maintenance of an office and staff for the accounting and administration of business transactions, until September 30, 1989 and NR Co. does not recommence its oil and gas business at any time thereafter, we share your view that NR Co. would be considered to have ceased to carry on its oil and gas business in Canada for the purposes of paragraph 115(4)(a) on September 30, 1989 notwithstanding that all of NR Co's Canadian oil and gas properties were sold on June 30, 1989.
Question 2
We acknowledge your question and concerns with respect to the application of subsection 115(4) and section 67.7 of the Act to the hypothetical transactions.
Similar concerns are raised in an article by Firoz K. Talakshi entitled "Selected Cross-Border Dispositions and Re-Organizations for U.S. Residents", Canadian Petroleum Tax Journal, Spring 1989, at pages 92-95
We however are unable to comment on your questions and concerns at this time because we have previously referred these questions to the Department of Finance and are presently awaiting their reply.
The above comments are merely the expressions of opinion of those Revenue Canada officials named herein and as such should not be construed as advance income tax rulings, nor are they binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion. We refer you in this respect to paragraph 21 and 22 of Information Circular 70-6R2.
Yours truly,
Section ChiefResource Industries SectionBilingual Services and Resource Industries DivisionRulings Directorate