22 January 2002 External T.I. 2001-0096445 - SPECIFIED INVESTMENT BUSINESS

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: What constitutes "throughout the year" in context of paragraph (a) of the definition "specified business income" in subsection 125(7) of the Income Tax Act.

Position: The period commencing at the beginning of the year and ending at the end of the year.

Reasons: The word "throughout" in context of the expression "throughout the year" means, "from beginning to end". (see Webster's Seventh New Collegiate Dictionary).

XXXXXXXXXX 2001-009644
J. E. Grisé
January 22, 2002

Dear XXXXXXXXXX:

Re: Specified Investment Business

This is in reply to your letter of August 6, 2001, requesting our interpretation of the expression "throughout the year" in the definition of "specified investment business" in subsection 125(7) of the Income Tax Act (the Act).

Your enquiry stemmed from your review of an interpretation we issued on March 6, 2001 (document # 2000-0049105) where we concluded that a corporation carried on a "specified investment business" since it did not employ more than 5 full-time employees for the portion of the year after two rental properties were surrendered at the same time due to foreclosure. This resulted in the adverse tax consequence of not being able to consider the capital cost allowance recapture from the two rental properties as active business income although in the prior years the income of the corporation from its rental properties had been active business income since the corporation consistently employed more than 5 full-time employees prior to the foreclosure.

You are particularly concerned with the situation where a corporation commences or ceases to carry on a rental business in a taxation year and employs more than 5 full-time employees from its commencement or to its cessation but the business does not commence on the first day of its taxation year or cease on the last day of its taxation year. In our view, such a business could not be said to have employed more than 5 full-time employees throughout the year it commenced or ceased to carry on the business and, thus, would be a "specified investment business" in those years. In our view, the word "throughout" in the expression "throughout the year" means "from "beginning to end".

Paragraph 15 of Interpretation Bulletin IT-73R5, The Small Business Deduction, contains the following two statements:

"The phrase "...the corporation employs in the business throughout the (taxation) year more than five full-time employees..." 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."

"Vacancies caused by terminations that temporarily reduce the staff to less than six employees will normally not disqualify the corporation provided immediate action is taken to restore the staff to normal strength and there is no undue delay in filling the vacant positions."

In view of the first statement, it is possible for a corporation commencing to carry on a rental business on the first day of its taxation year to be other than a specified investment business on the first and subsequent days of the taxation year. Similarly, it is possible for a corporation ceasing to carry on a rental business on the last day of its taxation year to be other than a specified investment business on that day. The second statement addresses your concern on the loss of an employee due to attrition.

You are of the view that, in accordance with the spirit of the legislation, a rental business that is acquired or disposed in the year and employs more than 5 full-time employees while the business is owned by a corporation should be excluded from the definition of "specified investment business". There are other provisions of the Act where it would seem logical that a period other than "throughout the year" should apply, such as when a person dies prior to the end of that person's year-end, December 31. We note that section 122.51 of the Act resolves this problem by adopting a special rule that changes the requirement of "throughout the year" to "throughout the portion of the year before the individual's death" where a person dies in the year. In our view, a similar legislation change would be required to accomplish the end that you consider desirable. As indicated in our letter of March 6, 2001, any tax policy concerns should be addressed to the Department of Finance.

Paragraph 2 of Interpretation Bulletin IT-179R; Change of Fiscal Period, states, in part, the following:

"Requests for changes in fiscal periods will be approved if they can be demonstrated to be prompted solely by sound business reasons other than obtaining tax benefits."

On the basis of this statement, it is doubtful that a Director of a Tax Services Office would agree to a change in fiscal period in order to have a corporation's taxation year-end coincide with the sale of a rental business. Please refer to paragraph 5 of the above bulletin and IT- 474R, Amalgamations of Canadian Corporations, for your query with respect to an amalgamation.

We hope our comments are helpful.

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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