Dear Sirs:
Re: Subsection 111(5) of the Income Tax Act (the "Act")
We are replying to your letter of February 25, 1991 wherein you requested our views regarding the application of the above subsection to the hypothetical situation described in your letter.
In particular, you seek confirmation that the business of a recently acquired corporation Company B, would be regarded as a similar business to that currently carried on by the acquiring corporation, Company A, such that the deduction of B's non-capital losses from the income generated by A's business would not be prohibited by paragraph 111(5)(a)(ii) of the Act. In your letter you have pointed out that subsequent to the purchase of Company B shares, Company A wishes to transfer part of its operations to Company B. You have referred us to the case of Canadian Dredge and Dock Company Limited v M.N.R. (81 DTC 154) and asked if this case would support the contention that the operations of company A would be the same business as the operations of Company B for the purposes of subsection 111(5) of the Act.
It would appear that you have a specific situation in mind relating to a proposed transaction. Confirmation of the tax consequences of specific proposed transactions will only be provided in response to a request for an advance income tax ruling. As you are aware the procedure for requesting an advance ruling are fully described in Information Circular IC 70-6R2. We can, however offer the following general comments with respect to your enquiry.
Whether or not a particular business being carried on at a particular time is the same business as was carried on formerly is, of course a question of fact and would depend on the circumstances in each case.
Nevertheless, the Department has issued general guidelines on whether a successive business is a continuance of B former business or a new business. Please refer to the enclosed InterpretationBulletin 206R and in particular paragraphs 2, 3, 4 and 5 thereof. Paragraph 5 offers some specific examples of business operations that are considered to be of the same kind. You might also refer to Interpretation Bulletin 302R2 which discusses the utilization of losses of a corporation subsequent to change of control. The examples in paragraph 13 may assist you in deciding the course of action to take in your particular situation.
We might add that it is our view, the word "similar" in the context of paragraph 111(5)(b)(ii) of the Act has a narrower meaning than "having characteristics in common. To take such a broad interpretation would render the limitation in that subparagraph practically meaningless. We interpret the word "similar" in this context to mean "of the same general nature or character".
In view of our comments regarding income tax rulings, it would be inappropriate for us to comment on the possible effect of the above referred to Tax Review Board case on your hypothetical situation other than to say that it was decided in the taxpayer's favour on the basis of the facts and evidence presented at the hearing.
We trust our comments are of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch