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 the business of lending money can be considered as an active business because the corporation originated the loans from which the interest is received.
Position: No.
Reasons: The business is one described in the definition of "specified investment business" in ss. 125(7).
XXXXXXXXXX 2002-016857
P. Massicotte, CA, M.Fisc.
March 28, 2003
Dear XXXXXXXXXX:
Re: Specified Investment Business
We are writing in response to your letter of October 9, 2002, wherein you requested our comments in respect of the applicability of subsection 125(7) of the Income Tax Act (the "Act") in the situation where a corporation carries on the business of lending money.
You refer to technical interpretation #9722915 dated September 26, 1997 in which it was mentioned that although royalty income is generally from a source that is property, where it can be established that the royalty income is related to an active business carried on by the recipient corporation, or where the recipient corporation is in the business of originating property from which royalties are received, such income may be considered to be income from an active business.
Based on these comments, you ask whether a corporation whose principal business is to lend money can treat its interest income as active business income, on the basis that the corporation originated the loans from which the interest income is received. You mention the principal purpose of the corporation's business is to derive income from property (interest) and that it does not employ more than five full-time employees at any time. We assume that the exception in paragraph (b) of the definition of "specified investment business" in subsection 125(7) of the Act also does not apply to the corporation, and that it does not receive any income from an associated corporation as contemplated in subsection 129(6) of the Act.
The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to provide you with the following general comments.
Pursuant to subsection 125(7) of the Act, the expression "income of the corporation for the year from an active business" generally refers to income from an active business carried on by it, including any income for the year pertaining to or incident to that business. As indicated in paragraph 5 of IT-73R6, the expressions "pertains to" or "incident to" involve a financial relationship of dependence of some substance between a property and an active business before the property is considered to be incident to or to pertain to the active business carried on by the corporation. In addition, the operations of the business have to have some reliance on the property such that the property is a back-up asset that could support the business operations either on a regular basis or from time to time.
Moreover, the courts have also held that when a corporation derived income from an activity that was inseparable from its normal active business, such income may properly be classified as active business income. If the income is part of the normal business activity of the corporation, and it is inextricably linked with an active business, it will be considered active business income.
Where a corporation receives royalty income from a particular property, the income from that property may be considered to "pertain to" or to be "incident to" the corporation's active business. Such royalty income may be derived from an activity that is inseparable from or inextricably linked with an active business carried on by the corporation. Accordingly, where the royalty income is related to an active business otherwise carried on by the recipient corporation, or where the corporation is in the business of originating property from which royalties are received, the income will be considered to be income from an active business. An example may be where a corporation develops computer software and then releases it to the public via licences. The licence fees could pertain to the corporation's research and manufacturing business and thereby be considered to be active business income. Another example would be where a soft drink company develops a new product, creates a trade-mark for the product and develops public demand for the product, then licences other persons to manufacture and sell the product under that trade-name. The licence fees could pertain to the company's active business of manufacturing and marketing.
In the situation you described, it is our opinion the corporation would be carrying on a specified investment business as the interest income does not "pertain to" and is not "incident to" an active business carried on by the corporation. Furthermore, it cannot be considered that the activity of lending money in that situation is inseparable or inextricably linked to an active business carried on by the corporation.
We trust the above comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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