Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether business of a corporation is considered a specified investment business for the purposes of ss. 125(7) of the Act.
Position: Yes.
Reasons: Corporation does not employ in the business throughout the year more than 5 full-time employees.
XXXXXXXXXX 2001-010587
Patrick Massicotte, CA
April 25, 2002
Dear XXXXXXXXXX:
Re: Specified Investment Business
We are writing in response to your letter of October 15, 2001, wherein you requested our comments regarding the interpretation of the provisions of subsection 125(7) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your enquiry.
In the situation you submitted, a corporation carries on two separate businesses. The first business consists in holding shares of subsidiary corporations, which are engaged in active business activities, and in rendering managerial services to these corporations in consideration for management fees (the "active business"). The second business consists in holding portfolio investments in publicly traded securities (the "investment business").
You mention that the corporation employs throughout a given year 12 employees on a full-time basis, of which 4 work exclusively for the active business. The remaining 8 employees work in both businesses, without any working full-time in either business throughout the year. A breakdown shows that each employee works between 30% and 90% of its time for the investment business, with an average of 58.5% for all 8 employees.
You seek our interpretation of the definition of "specified investment business" in subsection 125(7) of the Act in light of the situation described above, and in particular, whether the corporation can be considered to employ in its investment business throughout the year more than 5 full-time employees for the purposes of paragraph (a) of that definition.
Written confirmation of the tax implications arising from particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request pursuant to Information Circular 70-6R4. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments which may be of assistance. As requested, we have assumed that the above scenario involves two separate businesses; however, such a determination is a question of fact (see Interpretation Bulletin IT-206R).
The CCRA's interpretation of the term "specified investment business" is provided in paragraphs 11 to 17 of Interpretation Bulletin IT-73R6. It is generally a question of fact whether the principal purpose of a business is to derive income from property (including interest, dividends, rents and royalties). It is also a question of fact whether gains or losses from trading in securities are on income account or capital account. Interpretation Bulletin IT-479R lists some of the factors to be considered in making such a determination. In addition, as stated in paragraphs 5 and 15 of IT-479R, all gains or losses on security transactions by a trader in securities are part of the normal operation of such a business and thus are on income account. Therefore, a corporation which is a trader in securities may not be considered to carry on a business the principal purpose of which is to derive income from property and any interest or dividend income of the corporation for a year that would pertain to or be incident to that business may be considered income from an active business, under subsection 125(7) of the Act.
Where the principal purpose of a business carried on by a corporation is to earn income from property, it will generally be considered a specified investment business, as defined in subsection 125(7) of the Act, unless the corporation meets the requirements found in paragraph (a) or (b) of that definition. As mentioned in paragraph 15 of IT-73R6, the phrase "...the corporation employs in the business throughout the (taxation) year more than five full-time employees..." found in paragraph (a) of that definition is considered to mean that an employer has six or more employees working a full business day (or a full shift) on each working day of the year, subject to normal absences due to illness or vacation. Employees working part-time cannot qualify as full-time employees.
In our view, the wording and the purpose of the provision are intended to draw a line between active businesses and those that are not. It contemplates measuring the level of activity of a particular business by counting the number of employees working full-time in that particular business (see Lerric Investments Corp., 2001 DTC 5169 (FCA)).
Based on the facts submitted, the corporation would not be considered to employ in its investment business throughout the year more than 5 full-time employees for the purpose of the definition of "specified investment business" in subsection 125(7) of the Act as it does not have six or more employees working a full business day (or a full shift) on each working day of the year in that business.
You also ask how many employees in the situation described above would be considered employed on a full-time basis in the investment business. Based on the facts submitted, it does not appear that any of the corporation's employees may be considered as working a full business day (or a full shift) on each working day of the year in the investment business. As a result, in the situation you submitted, the corporation would not be entitled to consider any employee in determining whether that business constitutes a specified investment business for the purposes of subsection 125(7) of the Act. We would also note that the allocation of an employee and the totalling up of bits and pieces so as to arrive at more than 5 full-time employees is generally not considered by the courts as being consistent with the intention of the provision (see Federal Court of Appeal and Tax Court of Canada decisions in Lerric Investments Corp. and Federal Court-Trial Division decision in Hughes & Co. Holdings Ltd, 94 DTC 6511).
We trust the above comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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