9 October 2015 APFF Roundtable Q. 2, 2015-0595521C6 F - Meaning of "actively engaged" -- translation

Principal Issues: (1) Whether CRA’s comments on the meaning of "actively engaged on a regular and continuous basis" expressed in the context of the business of farming (IT-349R3 and IT-268R4) may apply to interpret the meaning of "actively engaged on a regular basis" used in the definition of "split income" in subsection 120.4(1) of the Act. (2) Whether a real estate trust managed by an entity dealing at arm’s length with the specified individual is subject to the kiddie tax.

Position: (1) General comments provided. (2) General comments provided.

Reasons: (1) Question of fact. (2) Question of fact.

9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE

Question 2 Meaning of "actively engaged"

The 2014 Federal Budget proposed a measure which targeted preserving the integrity of the split income tax. It proposed amending the definition of "split income" in the Income Tax Act for the 2014 and subsequent taxation years to include income that a trust or partnership pays or allocates, directly or indirectly, to a minor where the following two conditions are met:

• the income is derived from a source that is a business or the rental of property;
• a person related to the minor, as the case may be,

• is actively engaged on a regular basis in the activities of a particular partnership or trust related to earning income from a business or the rental of property; or
• in the case of a particular partnership, has an interest in the particular partnership directly or indirectly through one or more other partnerships.

This new measure is also included in the definition of "split income" in subsection 120.4(1).

Thus, rental income allocated by a trust to a minor child, regardless of where the property is leased, may now be subject to the "kiddie tax" rules. On the other hand, the split income tax rules would not apply in such a situation if there were no persons related to the minor who took an active part, on a regular basis, in the activity which consists of deriving income from the rental of property.

The expression "actively engaged on a regular basis" is used in particular in the context of a farming business. Paragraph 16 of Interpretation Bulletin IT-349R3 (footnote 1) published by the CRA clarifies the meaning of this expression in this context:

Subsection 70(9) and the definitions in subsection 70(10) of "shares of the capital stock of a family farm corporation" and "interest in a family farm partnership" require that a person be "actively engaged on a regular and continuous basis" in the business of farming. Whether a person is "actively engaged on a regular and continuous basis" is a question of fact; however, it is considered that the requirement is met when the person is "actively engaged" in the management and/or day to day activities of the farming business. Ordinarily the person would be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determinant in the successful operation of the business. Whether an activity is engaged on a "regular and continuous basis" is also a question of fact but an activity that is infrequent or activities that are frequent but undertaken at irregular intervals would not meet the requirement.

In addition, paragraph 27 of Interpretation Bulletin IT-268R4 (footnote 2), again in the context of a farming business, states:

Subsection 73(3) and the definitions in subsection 70(10) of "shares of the capital stock of a family farm corporation" and "interest in a family farm partnership" require that a person be "actively engaged on a regular and continuous basis" in the business of farming. Whether a person is "actively engaged on a regular and continuous basis" is a question of fact. However, the requirement is considered to have been met when the person is "actively engaged" in the management and/or day to day activities of the farming business. Ordinarily the person would be expected to contribute time, labour and attention to the business to a sufficient extent that such contributions would be determinant in the successful operation of the business. Whether an activity is engaged on a "regular and continuous basis" is also a question of fact but an activity that is infrequent or activities that are frequent but undertaken at irregular intervals would not meet the requirement. If farming is not the chief source of income, that is, subsection 31(1) applies, it may be more difficult to demonstrate that the taxpayer, the taxpayer's spouse or the taxpayer's child was actively engaged on a regular and continuous basis in the business of farming.

Questions to the CRA

a) Can the CRA confirm that the phrase "actively engaged on a regular basis" for the purposes of the new split income rules can be interpreted in the same way as "actively engaged on a regular and continuous basis", as defined in the two previous Interpretation Bulletins in a farming business context, but with the necessary adaptations?

b) Would the new split income rules apply in the event that the management of the rental property held by a trust is provided by an external property manager (unrelated to the minor) who exclusively carries out the tasks related to the building activities and its management, in consideration for a percentage of the gross rents?

CRA Response to question 2 a)

The expression “actively engaged on a regular basis” is not defined in the Income Tax Act. Consequently, we must interpret these words in their ordinary sense in the light of the facts, and relevant circumstances of each case. This is essentially a question of fact.

However, the expression “actively engaged” accompanied by the words "on a regular and continuous basis" are used in a few instances in the Income Tax Act.

For example, as highlighted in the question, the expression "actively engaged on a regular and continuous basis" is used, among other instances, in the context of a farming or fishing business in subsections 70(9), 70(9.3), 70(10), 73(3), 110.6(1.2) and 110.6(1.3). Furthermore, the definition of “specified member” in subsection 248(1) refers to any member, other than a member who is…actively engaged in …activities of the partnership business…on a regular, continuous and substantial basis.” The Canadian courts as well as the CRA have already pronounced on the interpretation of the words “actively engaged” in these two contexts.

In interpreting the expression “actively engaged on a regular basis” contained in subsection 120.4(1), it would be reasonable to refer to (as potentially informative) the interpretation which the courts and the CRA have accorded to a similar expression in adapting these statements to subsection 120.4(1), as well as the context and object of the provision.

CRA Response to question 2 b)

In determining whether income comes within the new clause (c)(ii)(D) of the definition of “split income” provided in subsection 120.4(1), it is necessary to determine if a person who is related to the minor is actively engaged on a regular basis in the activities of the trust which is to derive income from the property rental.

Your question does not specify what is the role of the person related to the minor in the activities of the trust. If the related person does not take any part in the activities of the trust which consists of deriving income from the rental of property, it appears to us that the condition provided by that clause has not been satisfied.

However, we believe that simply according the management of the rental property to an unrelated third party does not automatically exclude in all cases the possibility that a person related to the minor could also be actively engaged on a regular basis in the activities of the trust which are the rental of property. This is a question of fact.

Urszula Chalupa
(613) 670-9015
October 9, 2015
2015-059552

FOOTNOTES

Due to our systems requirements, the footnotes contained in the original document are reproduced below:

1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-349R3 (archived), Intergenerational Transfers of Farm Property on Death, November 7, 1996.
2 CANADA REVENUE AGENCY, Interpretation Bulletin IT-268R4 (archived), Inter Vivos Transfer of Farm Property to Child, April 15, 1996.