7 August 1990 Internal T.I. 74569 F - UCC Class 10 - Separate Businesses

Subject: 24(1)

We are writing in reply to your memorandum dated December 1, 1989, wherein you requested a technical interpretation of section 1101 and 1204 of the Income Tax Relations (the "Regulations") in relation 24(1)

FACTS

The following facts were provided by the Calgary District Office ("Calgary D.O.") in their memorandum dated August 2, 1989, as amended by our telephone conversation, of June 5, 1990, with Gary Kwan, Large Files Auditor of the Calgary D.O..

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OUR COMMENTS

Separate Business

Regulation 1101(1) provides 

     "Where more than one property of a taxpayer is described in the same class in Schedule II (of the Regulations) and where

     (a)  one of the properties was acquired for the purpose of gaining or producing income from a business, and

     (b)  one of the properties was acquired for the purpose of gaining or producing income from another business or from the property,

     a separate class is hereby prescribed for the properties that

     (c)  were acquired for the purpose of gaining or producing income from each business; and

     (d)  would otherwise be included in the class."

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The test as to whether separate businesses exist is found in Scales v. George Thompson & Company, Limited (1927), 13 TC 83.  Therein, Mr. Justice Rowlatt found it to be a question of fact whether or not different operations constitute one business or two separate businesses.

He stated at page 89

     "I think the real question is, was there any inter-connection, any interlacing, any inter-dependence, any unity at all embracing those two businesses;".

Factors that are relevant in making such a determination are provided at paragraph 3 of Interpretation Bulletin IT-206R and include

(a)     the extent to which the two operations have common  factors that may be pertinent,

(b)     whether the operations are carried on in the same premises,

(c)     whether one operation exists primarily to supply the other,

(d)     whether the taxpayer's accounting system records the transactions of both operations as if they were those of one business, or whether separate complete sets of records are maintained throughout the year.

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Regulation 1101

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1984 Advance Income Tax Rulings

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In this regard, reference is made to Powell Rouyn Gold Mines Ltd. v. H.N.R., 59 DTC 401, T.A.B., and Bessemer Trust Company et al. v. M.N.R., 72 DTC 6404, F.C.T.D., in which recapture of CCA was held to be applicable to the .same source of income from which the relevant CCA was deducted in prior years. The Bessemer Trust case further held that the recapture provisions of the Act and the Regulations are fundamentally adjustments to income of previous years and do not create, in the year of disposal of the asset, some new form or source of income.

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Other

Gary Kwan requested our comments with respect to a hypothetical situation described at page 3 of the Calgary D.O. memorandum wherein an unintended benefit, i.e., enhanced resource allowance deduction, was perceived to have accrued to a taxpayer who maintains a single Class 10 pool of assets comprising assets used to earn resource profits and assets which are not used to earn resource profits.  Had separate classes been required, disposition of assets which are not used to earn resource profits would result in recapture of CCA.  The hypothetical situation assumes that since separate classes are not required, this recapture of CCA, which would otherwise result, would reduce the U.C.C. pertaining to assets which are used to earn resource profits.  Since CCA claims on assets used to earn resource profits reduce resource profits under the provisions of Regulation 1204(1), reduction of the U.C.C. of these assets results in reduction of the total CCA claims which would eventually reduce resource profits, thereby achieving the perceived benefit.  See Illustration I.

As shown in the attached Illustration II, it is our view that no benefit would result in the above hypothetical situation because actual recapture of CCA would be included in resource profits only to the extent that it pertains to CCA claims which were deducted in computing resource profits.  This is supported by the aforementioned Powell Rouyn and Bessemer Trust cases.

DirectorBilingual Services and ResourceIndustries DivisionRulings Directorate

ILLUSTRATION I

NOTE:

1.     According to the Calgary District Office, CCA claims that would reduce resource profits under Regulation 1204: 

ILLUSTRATION II

NOTES:

1.     Although there is a notional resource UCC of $59, the actual CCA claimed in Year 3 is $39 X 30%, ie, $12, which is the amount that reduces resource profits in Year 3.

2.        Although there is a notional recapture on the non-resource UCC in Year 3, it is not realized until year 4.

Conclusion:

Irrespective of whether a single or separate businesses exist, the overall effect on the resource profits calculation is the same.  Differences are not absolute buy only timing.