| October 11, 1990 | |
| TORONTO DISTRICT OFFICE | Head Office |
| Business and General | |
| Division | |
| G. Cappella | F.B. Fontaine |
| Audit Review Section | (613) 957-2095 |
| Business Enquiries Group | |
| 148-2-1 | 901055 |
SUBJECT: 24(1)
This is in reply to your memorandum dated June 5, 1990 concerning the above- captioned taxpayers. Our understanding of the situation is as follows:
24(1)
24(1)
Our comments are as follows:
A. Our interpretation of subsection 111(5) of the Act as et read at December 30, 1986 24(1) compatible with the interpretation stated in the correspondence from 24(1). The effect of subsection 111(5), to allow, after a change of control, the deduction of only non-capital losses or farm losses arising from carrying on a business but to restrict the deduction of the loss where the loss was incurred in carrying on a business prior to the change of control. In other words, the restrictions or conditions under subsection 111(5) did not apply to non-capital losses from other sources and since the deduction of such losses were not specifically forbidden under that provision, they were, therefore, available for deduction by a taxpayer after it changed control.
B. Paragraph 88(1.1)(c) provides for the deduction by a parent, upon the winding up of a subsidiary into the parent, of the subsidiary's non-capital loss that arose from carrying on the subsidiary's business. In addition the parent is also allowed to deduct the non-capital loss of the subsidiary that was incurred from "any other source" pursuant to paragraph 88(1.1)(d) which, for instance, may include an allowable business investment loss or a loss from property. As in subsection 111(5), paragraph 88(1.1)(e) imposes certain restrictions in respect of the deductibility of a non-capital loss, by the parent, where that loss was incurred by the subsidiary from carrying on a business. That paragraph does not apply to restrict losses that arose from other sources.
C. We also agree with the comments in 6 above. Bill C-64 (now Chapter 46) which amended subsection 111(5) came into force for acquisitions of control occurring after January 15, 1987. The Explanatory Notes in respect of those amendments read, in part, as follows:
"As a result of this amendment, a loss from property or allowable business investment loss incurred by a corporation before the time of acquisition of its control may no longer be carried forward as a non-capital loss to be deducted after that time".
A similar comment was made in the Explanatory Notes with respect to similar changes made to paragraph 88(1.1)(e). Those amendments to subsection 111(5) and paragraph 88(1.1)(e) clearly stipulate that all non-capital losses are not deductible, with certain exceptions. Previously, subsections 111(5) and 88(1.1) stipulated that losses from a business were deductible, subject to certain restrictions, without mentioning what losses were not deductible.
D. We agree that your comments in 7(d) could be used as a valid argument if the particular loss was derived from carrying on a business. However, such an argument would not be supportable in respect of a non-capital loss that is an allowable business investment loss.
In conclusion, it is our view that the law under subsections 111(5) and 88(1.1) of the Act as it read at December 31, 1986
24(1)
We hope that our comments will be of assistance to you.
R.E. ThompsonChiefMerchandising, Manufacturing and Construction SectionBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch