3 November 1994 External T.I. 9408585 - PRINCIPAL BUSINESS CORPORATION

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Will a corporation qualify as a "principal-business corporation" when 50 percent of its income is from a qualifying business activity and 50 percent of its income is from shares held in related corporations that qualify as "principal-business corporations"?

Position TAKEN:

Definition of "principal-business corporation" in subsection 66(15) of the Act adequately encompasses corporations whose business activities are intended to be qualified. The second method of qualification, intended for holding companies, appears to provide the necessary flexibility to allow a corporation to qualify as a "principal-business corporation" when its principal activity is holding shares in operating companies.

Reasons FOR POSITION TAKEN:

Principal-business corporation status is determined as a question of fact.

XXXXXXXXXX                          		5-940858

Attention: XXXXXXXXXX

November 3, 1994

Dear Sirs:

Re: Principal-Business Corporation

This is in reply to your letter dated March 24, 1994 wherein you requested our views with respect to the definition for "principal-business corporation" in subsection 66(15) of the Income Tax Act (the "Act").

In this regard we provide you with the following general comments which may be of assistance to you. Our comments, however, should not be construed as confirming the income tax consequences of a particular transaction. We should also advise that your suggestion of a change to the Act, whereby the subsection 66(15) definition of "principal-business corporation" is expanded to include a corporation that would not otherwise qualify as a principal-business corporation, should be addressed directly to Department of Finance as amendments to the Act are the responsibility of that department.

In a hypothetical situation, A Corp derives 50 percent of its income from participating directly in one or more businesses described in paragraphs (a) to (g) of the definition of "principal-business corporation" in subsection 66(15) of the Act. A Corp owns shares in a related company ("B Corp") (they are related otherwise than because of a right referred to in paragraph 251(5)(b) of the Act). B Corp is a "principal-business corporation". A Corp derives 50 percent of its income from the B Corp shares. However, not all nor substantially all of A Corp's assets are shares of the capital stock of B Corp.

It is always a question of fact as to what would be the principal business of A Corp. The criteria as described in paragraph 14 of Interpretation Bulletin IT-400 may be helpful in such a determination. Please note that income from a business is only one of those criteria and it should be considered with the other criteria.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 21 of Information Circular 70-6R2, the above comments do not constitute an advance income tax ruling and accordingly are not binding on the Department.

Yours truly,

for A/Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Policy and Legislation Branch
- 3 -

.../cont'd