13 February 2001 Internal T.I. 2001-0064807 - Qualifying active business, leasing property

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 the leasing of property to franchise businesses constitute a qualifying active business within the meaning of subsection 5100(1) of the Regulations?

Position:

Question of fact.

Reasons:

There is insufficient information regarding the proposed transactions to make this determination.

			February 13, 2001

		KITCHENER-WATERLOO TSO	HEADQUARTERS
	Gary Huenemoeder 	Income Tax Rulings
			  Directorate
M. P. Sarazin
(613) 824-5441

2000-006480

Qualifying Active Business

We are writing to you in response to your referral to Renée Jennings of the Registered Plans Directorate, requesting our views as to whether the leasing of equipment and improvements to franchisees of a certain franchise would constitute a qualifying active business within the meaning assigned by subsection 5100(1) of the Income Tax Regulations (the "Regulations").

Comments

Opinions concerning proposed transactions involving specific taxpayers should only be provided in response to a request for an advance income tax ruling. Your client should be advised that an advance income tax ruling will be provided if a request is submitted in accordance with the procedures detailed in Information Circular 70-6R4 dated January 29, 2001.

Whether or not a business is a qualifying active business within the meaning of subsection 5100(1) of the Regulations is a question of fact which can only be determined after a review of all of the relevant information.

A "qualifying active business" is defined in subsection 5100(1) of the Regulations and generally includes any business which is carried on primarily in Canada except where the principal purpose of the business is to earn income from property including interest, dividends, rent and royalties or gains derived from dispositions of property (other than inventory). A qualifying active business may, however, include a business of leasing property other than real property.

Where a corporation leases computers, telephones, desks, security systems, filing cabinets, art work, signs, lighting, wall coverings and flooring to specific corporations, we believe that it would be difficult to argue that the corporation's business is not one the purpose of which is to earn income from property. However, this determination, as well as the resolution of whether the assets leased amount to the business of leasing property other than real property, would require a review of all of the facts and the degree of activity carried out by the corporation.

Where the conditions described in (b), (c) and (d) of the definition of qualifying active business are satisfied, one would have to determine whether there is enough activity carried out by the corporation to support the existence of a business. We could accomplish this through an application for an advance income tax ruling.

We note that the corporation intends on "leasing" the property to the specific corporations. The fact that paragraph 5100(1)(a) of the definition specifically excludes businesses that lease real property may be pertinent in determining whether a qualifying active business exists. In making this determination, we would refer you to IT-459, Adventure or concern in the nature of trade, and IT-73R5, The Small Business Deduction, which provide the Canada Customs and Revenue Agency's general views relating to the existence of a business and an active business as those terms are used in other sections of the Income Tax Act.

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 Canada Customs and Revenue Agency'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 Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Roberta Albert, CA
for Director
Financial Industries Division