| 19(1) | File No. 5-8570 |
| S. Shinerock | |
| (613) 957-2108 |
September 13, 1989
Dear Sirs:
Re: Subsection 111(5) of the Income Tax Act (the "Act")
We refer to your letter of August 23, 1989, in which you requested our views on the application of the provisions of subsection 111(5) of the Act to an acquisition of control of a taxable Canadian corporation ("Lossco") in the two hypothetical situations described below. Taxable Canadian corporation has the meaning assigned by paragraph 89(1)(i) of the Act.
Situation 1
Lossco has incurred non-capital losses from carrying on a business. Purchaseco (an unrelated company) acquires all of the shares of Lossco. Purchaseco carries on a similar business to that carried on by Lossco and wishes to combine the operations of Lossco with its own business. Lossco is amalgamated with Purchaseco pursuant to the provisions of subsection 87(1) of the Act to form New Purchaseco, and within the first taxation year following the amalgamation, New Purchaseco enters into a partnership arrangement with Partnerco (an unrelated company) to carry on the business of New Purchaseco, which will be comprised of Lossco's business and New Purchaseco's business. It is assumed that Partnerco does not itself carry on any business but merely provides equity capital to the partnership. Assuming that the partnership will carry on the loss business formerly carried on by Lossco, you have requested our views as to whether New Purchaseco would meet the requirements of subparagraph 111(5)(a)(i) of the Act even though the loss business would be carried on by the partnership and New Purchaseco's interest in that business as well as in the similar business referred to above would change as a result of the interest of Partnerco in those businesses.
Situation 2
Lossco is a member of a partnership and has accumulated non-capital losses from its share of the operating losses of the partnership. Purchaseco (an unrelated company) acquires all of the shares of Lossco. Purchaseco carries on a similar business to that carried on by Lossco through the partnership. Purchaseco is amalgamated with Lossco pursuant to the provisions of subsection 87(1) of the Act to form New Purchaseco, with the result that New Purchaseco would become a member of the partnership. Assuming that the partnership continues to carry on the loss business, you ask whether New Purchaseco would meet the requirements of subparagraph 111(5)(a)(i) of the Act.
In each situation referred to above, it is assumed that the partnership would be a Canadian partnership within the meaning assigned by paragraph 102(a) of the Act.
Opinions
It appears your request may relate to a specific proposed transaction. Confirmation of the tax consequences of a specific proposed transaction will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 70-6R. We are, however, able to provide the following general comments in response to your enquiry.
It is a question of fact whether a business is carried on by a corporation for profit or with a reasonable expectation of profit throughout a particular taxation year for the purposes of subparagraph 111(5)(a)(i) of the Act, and on this, we make no comment. However, assuming that such is the case in the two situations described above, then in our view, New Purchaseco may deduct its non-capital losses, determined pursuant to the provisions of paragraph 111(8)(b) and subsection 87(2.1) of the Act, against New Purchaseco's share of the income of the partnership derived from carrying on the loss business formerly carried on by Lossco, subject of course, to the limitations of paragraph 111(1)(a) of the Act. Having said this, we would point out that the introduction of other partners may alter this view or may result in a different business being carried on by the partnership. The provisions of section 103 should also be borne in mind.
The provisions of section 245 of the Act may be applicable to a specific situation if the transactions are carried out in order to avoid a specific rule which precludes the deduction of losses.
The comments expressed in this letter are of a purely general nature, do not consider what would be a "similar business" in your situation, and do not take into account any other considerations that might arise in the context of a specific situation. Also, in accordance with paragraph 24 of Information Circular 70-6R, the views expressed herein do not constitute advance income tax rulings and consequently, are not binding on the Department.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch