XXXX J.C. Clark Tel. (613) 993-6201
XXXX
December 31, 1985
Dear Sirs:
Re: Request for Advance Income Tax Ruling
XXXX
In your letter of, November 4, 1985 you requested an advance income tax ruling on behalf of XXXX. The procedure for advance ruling requests is set out in Information Circular 70-6R, published by Revenue Canada, Taxation ("RCT") on December 18, 1978 ("Information Circular 70-6R"). Paragraph 15 of Information Circular 70-6R states that where a request for a ruling is made by a taxpayer's representative, the representative will be required to submit written evidence that he is authorized to act for the taxpayer in requesting the ruling. We did not receive specific authorization of this type with your application.
It is stated in paragraph 3 of Information Circular 70-6R that an advance income tax ruling is a statement given by RCT as to how specific provi- sions of the law will be interpreted in respect of a definite proposed transaction or transactions. Paragraph 14(g) includes in a list of ex- clusions from advance income tax rulings any proposed transactions which are to be completed at some indefinite future time. The case you have submitted involves an acquisition of control of a corporation upon an arm's length sale of its shares. As no specific buyer has been identified and no date of sale has been stated, we are unable to provide an advance income tax ruling. Should you wish to resubmit your application once a purchaser had been found we would be able to consider your request. In addition to the requirements stated above, we draw your attention to the required inclusions in a ruling application which are stated in paragraph 16 of Information Circular 70-6R.
Although we are unable to provide an advance income tax ruling in this case, we have set out below our reaction to the comments in your letter.
Provided that a business which has incurred losses continues to be carried on with a view to profit by a corporation following an acquisition of control, as required by subparagraph 111(5)(a)(i) of the Income Tax Act (the "Act"), subparagraph 111(5)(a)(ii) provides that a corporation's non-capital loss or farm loss, as the case may be, for a taxation year ending before control changes is deductible only to the extent of the aggregate of:
(A) the corporation's income for the particular year from that business and, where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services, and
(B) the amount, if any, by which:
(i) the aggregate of the corporation's taxable capital gains for the particular year from the disposition of property owned by the corporation at that time, other than property that was acquired from the purchaser or a person who did not deal at arm's length with the purchaser,
exceeds
(ii) the amount, if any, by which the aggregate of the corporation's allowable capital losses for the parti- cular year from the disposition of property described in subclause (i) exceeds the aggregate of its allow- able business investment losses for the particular year from the disposition of that property.
Provided that the test in subparagraph 111(5)(a)(i) is met, the test as to deductibility of losses incurred by a corporation prior to an acquisition of control is therefore, whether there is income from the former loss business or from any other business substantially all the income of which was derived from the sale of similar properties or the rendering of similar services.
It is our view that a cash crop farmer ordinarily derives income from selling tangible property rather than rendering services. Therefore following an acquisition of control and a transfer of another business into the loss corporation (or a winding-up of the loss corporation pursuant to subsection 88(1) of the Act) it would be necessary to determine whether the profitable business derived its income from the sale of products similar to those sold by the loss business. When the loss business involved the cultivation and sale of onions and the profitable business involved the cultivation and sale of another vegetable, we would probably conclude that the products were similar for purposes of subparagraph 111(5)(a)(i) of the Act. We would probably conclude that the cultivation of vegetables was not similar to the sale of poultry or livestock.
The opinions expressed here are not advance income tax rulings and are not binding upon RCT, as explained in paragraph 24 of Information Circular 70-6R.
Yours truly,
for Director General Specialty Rulings Directorate Legislation Branch