| 19(1) | File No. 5-8499 |
| J.E. Harms | |
| (613) 957-2109 |
October 25, 1989
Dear Sirs:
Re: Personal Services Business and Non-Capital Losses
We are writing in reply to your letter of August 8, 1989 in which you requested our opinion regarding the deductibility of a non-capital loss carry forward in computing the taxable income of a corporation carrying on a personal services business in the following hypothetical situation:
1. An individual owns all the shares of a corporation which has accumulated non-capital losses from carrying on an active business.
2. The individual has financed the corporation by injecting personal funds by way of a shareholder's loan.
3. The corporation ceases to carry on the active business due to the continued losses.
4. After ceasing its active business the corporation commences a personal services business by providing the services of its shareholder to a non-related third party.
5. The shareholder/employee of the corporation does not take a salary but draws down on his shareholder loan.
Paragraph 18(1)(p) of the Income Tax Act (the "Act") prohibits the deduction of certain outlays and expenses of a corporation carrying on a personal services business in computing its income from that business.
The deduction of non-capital losses under subsection 111(1) of the Act is a deduction in computing taxable income under Division C of Part I and not in computing income under Division B of Part I of the Act. Thus, as you point out, paragraph 18(1)(p) does not prohibit the deduction of the non-capital losses carried forward from previous years.
The restrictions against the deduction of non-capital losses contained in subsection 111(5) of the Act would also not apply as there has been no acquisition of control by any person or group of persons in the hypothetical situation outlined above.
Although there is no specific provision in the Act that would prohibit the deduction of the non-capital losses in this situation, you are concerned that subsection 245(2) might be applicable to redetermine the tax consequences to deny the tax benefit enjoyed by the shareholder.
In our view the shareholder could be said to have obtained a "tax benefit" within the meaning of that term in subsection 245(1) of the Act. The tax benefit would consist of an avoidance of the tax that would otherwise be payable on income from employment.
The performance of services by the shareholder through a corporation is, in our view, an arrangement that constitutes a "transaction" within the meaning of that term in subsection 245(1) of the Act" Such an arrangement may, depending on the purposes of entering into the arrangement, constitute an avoidance transaction within the meaning of subsection 245(3) of the Act. Therefore, subsection 245(2) could be applicable to redetermine the tax consequences unless the arrangement is exempt from the application of subsection 245(2) by virtue of subsection 245(4).
Without being apprised of all of the facts of a particular case, we are not prepared to comment conclusively on the applicability of the exemption in subsection 245(4) to the situation outlined above. Nevertheless, on the basis of the information provided, it is our opinion that the exemption in subsection 245(4) of the Act could apply as the result obtained would not offend the specific limitations on utilization of non-capital losses in section III of the Act.
If you have a fact situation similar to the circumstances outlined above, you might wish to apply, in accordance with the procedures outlined in Information Circular 70-6R, for an advance income tax ruling on the application of subsection 245(2) of the Act.
Our opinions as stated herein are not rulings and as stated in paragraph 24 of Information Circular 70-6R are not binding on Revenue Canada Taxation.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch