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: Whether a corporation is carrying on a "business" within the meaning thereof in subsection 248(1) of the Act given a particular set of facts.

Position: Question of fact, but in this situation probably not.

Reasons: Have to consider whether the expenses are personal or living expenses of the shareholders and whether there is any reasonable expectation of profit.

		November 1, 2000

	Public Sector Bodies and Governments	HEADQUARTERS
	Pierre Bertrand, Director	A. Seidel
(613) 957-2058
	Attention: Neil Minken
		2000-005086

XXXXXXXXXX

This is in reply to your memorandum dated October 10, 2000 in which you requested our views as to whether XXXXXXXXXX, operating as XXXXXXXXXX (hereinafter referred to as "XCo"), is carrying on a "business" within the meaning thereof in subsection 248(1) of the Income Tax Act (the "Act").

Background

1. XCo was incorporated on XXXXXXXXXX and is registered for GST purposes. The Articles of Incorporation state that there are no restrictions on the business that the corporation may carry on. XCo is authorized to issue, amongst others, an unlimited number of XXXXXXXXXX shares which carry the right to vote at all meetings of shareholders, the right to receive any dividend declared thereon and the right to receive the remaining property of the corporation upon dissolution.

2. XCo will construct and maintain a road in XXXXXXXXXX Ontario. The road will provide access to XXXXXXXXXX lots. A portion of the road will be on private property and a portion of the road will be on crown land. One of the conditions of the provincial "Work Permit" is that the road must be open to the public and that XCo does not have the right to restrict access to the road or charge tolls or other fees for its use on that portion of the road that is on crown land.

3. There are XXXXXXXXXX shareholders and each shareholder is a director of XCo and holds a specific office. The negotiating of contracts and supervising of work will be carried out by the shareholders without remuneration. Each shareholder owns a XXXXXXXXXX lot in the area that will be serviced by the road.

4. In XXXXXXXXXX, XCo entered into an agreement with XXXXXXXXXX contractors to construct the road. The Ministry of Natural Resources of Ontario issued a work permit to construct the road on crown land. The permit does not convey any right, title or interest in the land to XCo.

5. The construction costs of the road are to be financed by loans from the XXXXXXXXXX lot owners (the "Lenders"). The loans will be provided to XCo interest free and without specific terms of repayment.

6. The Lenders will also pay an annual fee to maintain the road. Anyone who is not a Lender may be charged a higher annual fee for access to the private portion of the road. Any surpluses generated from the annual fees are to be used to repay the Lenders.

7. XCo will contract out the maintenance work on the road.

8. XCo will not have its own address, telephone number or offices, it will not have any employees and it will not have any ongoing day-to-day activities. XCo does not advertise its activities and does not offer to supply goods or services to any persons other than the Lenders. Other than the "Work Permit" required to construct the road, XCo is not required to have any sort of business license or permit.

9. XCo will use the address of its accountants as its mailing address. XCo has liability insurance to protect itself against liabilities arising out of the operation and maintenance of the road. Financial statements will be prepared annually and provided to the shareholders and the Lenders. XCo will have its own bank account.

Excise Tax Act

You indicate in your memorandum that subsection 123(1) of the Excise Tax Act defines "business", in part, as follows:

"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether or not the activity or undertaking is engaged in for profit;"

Income Tax Act

Subsection 248(1) of the Act defines "business" as follows:

"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment;"

Issue

The issue is whether XCo may be considered to be carrying on a "business" within the meaning thereof in subsection 248(1) of the Act.

Our Comments

For income tax purposes, the expression "business", when used on its own, is given its broadest meaning. The concept of carrying on a business is generally broad enough to include any activity, including an adventure or concern in the nature of trade, provided the activity is entered into with a view to making a profit. This "profit test" is relevant, amongst other things, for the determination of whether or not a particular outlay or expense was made or incurred by a taxpayer for the purpose of gaining or producing income from a business, i.e. whether or not there was a reasonable expectation of profit or whether or not the outlay or expense is considered to be a personal or living expense. The Courts have confirmed this broad interpretation in cases such as Alvin Hamilton v. Her Majesty the Queen (97 DTC 787, TCC), wherein it was stated that a business exists where there is "some level of economic activity, with such activity being undertaken for the purposes of realizing a profit."

The Supreme Court of Canada, in looking at the issue of the distinction between income from a business and income from property, made the following comments in Canadian Marconi Company v. Her Majesty the Queen (86 DTC 6526):

"It is frequently stated in ... Canadian case law that there is, in the case of a corporate taxpayer, a rebuttable presumption that income received from or generated by an activity done in pursuit of an object set out in the corporation's constating documents is income from a business."

and further

"In a general sense CMC was incorporated to earn income by doing business. There is no reason why any income earned by it should not be considered as prima facie income from a business so long as it is recognized that the presumption is a rebuttable one. This approach has commended itself to courts even where no express object was contained in the constating documents ..."

This broad meaning of the expression "business" is then modified when considering specific provisions of the Act such as the small business deduction, where the expressions "active business" and "specified investment business" are defined.

In any particular situation, it is always a question of fact as to whether or not a taxpayer is carrying on business and this is generally determined by audit after a review of all of the relevant information and documentation. In the particular situation described above, there are two major concerns that would need to be addressed in determining whether XCo is carrying on business.

Firstly, the road that is being built appears to be for the use of the XXXXXXXXXX lot owners who have incorporated the company and are having the road built and maintained by contractors. The "Work Permit" does specify that the road must be available for use by the public but it is unlikely that this will ever happen if it leads to XXXXXXXXXX private property. The XXXXXXXXXX lot owners are providing interest free loans to XCo thereby personally financing the construction costs. There is a concern, therefore, that the corporation is a vehicle which will allow the XXXXXXXXXX owners to deduct the cost of building the road for tax purposes using the capital cost allowance provisions in the Act when the cost is really a personal expense of the XXXXXXXXXX lot owners. Alternatively, there have been many situations where a taxpayer incorporates an activity to protect themselves from personal liability in case of an accident or negligence.

Secondly, the issue of "reasonable expectation of profit" would need to be reviewed. Although the facts indicate that the road users will pay an annual fee which is to cover the cost of maintaining the road and that any excess is used to repay the shareholders, will these annual fees also take into consideration such things as depreciation so that the corporation does not report losses for tax purposes each year. Furthermore, what happens to these annual fees when the loans have been repaid and the road fully depreciated for tax purposes. Where it is determined that an activity is carried on with no reasonable expectation of profit, the whole amount of any losses will be disallowed as personal or living expenses pursuant to paragraph 18(1)(h) of the Act.

In summary, unless XCo is carrying on a business with a reasonable expectation of profit and the costs of building the road are not personal or living expenses of the shareholders, it is our view that XCo would not be carrying on "business" within the meaning thereof in subsection 248(1) of the Act. We also note that the definition under the Excise Tax Act appears to go even further than the Income Tax Act in that it includes in the meaning of "business" any economic activity, regardless of "whether or not the activity is engaged in for profit". Accordingly, there may be situations where a taxpayer will not be carrying on a "business" for income tax purposes but may still be carrying on a "business" for excise tax purposes.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

Bryan Dath
Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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