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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether exemption in 1100(16)(a)(ii) can apply
Position:
Depends on whether one business or more than one business (IT206R criteria)
Reasons:
If more than one business, the business that is the principal business must satisfy the 90% gross revenue test (IT371)
XXXXXXXXXX 2002-015651
Denise Dalphy, LL.B.
(613) 941-1722
December 18, 2002
Dear XXXXXXXXXX:
Re: Subsection 1100(16) of the Income Tax Regulations
We are writing in reply to your letter dated August 6, 2002 wherein you requested a technical interpretation with regard to the above-noted provision in the Income Tax Regulations (the "Regulations"). We also acknowledge your letter dated December 4, 2002.
You have described the following hypothetical situations:
Example A
Three corporations all of whom are related, each carry on as its sole business a business described in subparagraph 1100(16)(a)(ii) of the Regulations, i.e., a business of renting or leasing of leased property combined with selling and servicing property of the same general type and description. Each corporation has only one business location and the business location of each corporation is physically distinct from that of the others. A partnership is formed by the three corporations to carry the leasing activities of the corporations. As a consequence, all existing leases of the three corporations will be transferred to the partnership and all new leases that otherwise would have been entered into by any of the three corporations will be entered into by the partnership. The partnership will operate out of the business locations of each of the three corporations, although administration would likely be centralized in one location. Each corporation would be entitled to a share of the profits of the partnership. For the purposes of this example, it is assumed that section 103 of the Income Tax Act does not apply.
Example B
Same as Example A, above, except that a portion of the lease portfolio of each corporation will be retained by it (approximately 10% of the total number of leases).
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.
Subsection 1100(16) of the Regulations provides:
"Subsection (15) does not apply in respect of a taxation year of a taxpayer that was, throughout the year,
(a) a corporation whose principal business was
(i) ..., or
(ii) renting or leasing of property referred to in subparagraph (i) combined with selling and servicing of property of the same general type and description,
if the gross revenue of the corporation for the year from such principal business was not less than 90 per cent of the gross revenue of the corporation for the year from all sources; ..."
[emphasis added]
As is stated in paragraph 5 of IT 371, Rental Property - Meaning of Principal Business ("IT 371"), "Whether or not a business is a "principal" business is a matter of significance only where the taxpayer carried on more than one business in the taxation year." Whether a corporation carries on one business or two businesses is a question that can only be determined upon a review of all the facts. We agree that the reasons of the Exchequer Court in Pevato (65 DTC 5183) would be relevant, as well as the other extensive case law that has developed on the issue of same/separate business.
If it is determined that a corporation has more than one business, in order to determine whether the rule in paragraph 1100(16)(a) of the Regulations applies, it is necessary to determine which of the corporation's businesses is its principal business, and then whether that business meets the 90% test. Although the effect may be unintended, we are of the view that a corporation that carried on two businesses of the type described in subparagraph 1100(16)(a)(ii) of the Regulations, one of which produced 11% of the corporation's gross revenues and one of which produced 89% of its gross revenues, would not satisfy the test in paragraph 1100(16)(a) of the Regulations.
Finally, it appears that the hypothetical situations described above may in fact be transactions that one of your clients is seriously contemplating. Should you wish to submit a request for an advance income tax ruling, we would be pleased to give this issue further consideration.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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