TCC denies the use of acquired losses

In NRT Technology Corp v. The Queen, 2012 TCC 420, a company (NRT) acquired a target company with substantial business losses (Losses). NRT subsequently sought to use the Losses against its own taxable business income in a year following the acquisition. The CRA denied the use of the Losses under s. 111(5)(a), which generally required (i) that the business in which the Losses arose continued to be carried on for profit or a reasonable expectation of profit in the year, and (ii) that NRT’s taxable business income (against which the Losses were applied) was derived from the sale of similar properties or the provision of similar services (as those in the target’s loss business). The TCC found that the condition in (i) was not met. The target’s loss business was substantively “put on hold”, and therefore was not continued to be carried on. Alternatively, even if the minimal loss-business activities amounted to the continuance of the target’s loss business, those activities were not carried out either for profit or with a reasonable expectation of profit. On this latter point the TCC distinguished the decision in Stewart v. The Queen, where the Supreme Court of Canada held that any clear commercial activity necessarily involves the pursuit of profit. The TCC said Stewart was concerned only with whether a “business source” existed under s. 9. Here the test in s. 111(5)(a)(i) statutorily required both the continuance of the target’s loss business and a “reasonable expectation of profit” from that business (see paragraph 53). These are separate considerations.