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.
Principal Issues: Wether a corporation is a specified investment business.
Position: It is a question of fact to be determined upon a review of the circumstances.
Reasons: In one example, there is a corporation carrying on a business with the principal purpose of earning income from property and not having more than five employees. Accordingly, it is a specified investment business. In a second example, the circumstances are the same except that the corporation is associated with another corporation. Paragraph 129(6)(b) of the Act provides that when income from a source that is property is paid or payable by an associated corporation and deducted by the payor in computing its active business income it is deemed to be active business income in the hands of the recipient corporation. Accordingly, amounts paid for rent and deducted in computing active business income by another corporation would be deemed to be active business income in the hands of the corporation.
Charles Rafuse
XXXXXXXXXX 613-957-8967
2005-013218
May 31, 2005
Dear XXXXXXXXXX:
Re: Specified Investment Business
This is in reply to your letter of May 4, 2005, addressed to the Scarborough Tax Services Office, concerning whether a corporation carries on a specified investment business.
Specifically, you have requested guidance on two examples of corporate structure. One is where a corporation owns a property and rents the property to a partnership. The partnership consists of four partners who are equal shareholders in the rental corporation. The second example is where a corporation owns a property and rents it to a professional corporation. The professional corporation has four equal shareholders who are also equal shareholders in the rental corporation. In both examples the rental corporation does not have any other income than that of renting the property and does not employ more than five employees.
As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance.
A "specified investment business", as defined in subsection 125(7) of the Income Tax Act (the Act), carried on by a corporation in a taxation year means a business the principal purpose of which is to derive income from property. Further, a company will not be considered a specified investment business where it has more than five full-time employees, or where it would be reasonable to expect that the company would have required more than five full-time employees had it not received managerial, administrative, financial, maintenance or similar services from an associated company in the course of its carrying on an active business.
An "active business carried on by a corporation", as defined in subsection 125(7) of the Act, means any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade.
In the first example, there is a corporation carrying on a business with the principal purpose of earning income from property and not having more than five employees. Accordingly, it is our view that this is a specified investment business and thus the income would not be active business income.
In the second example, again there is a corporation carrying on a business with the principal purpose of earning income from property and not having more than five employees. However, there is now a corporate structure containing two associated corporations as both corporations have the same equal shareholders. Under paragraph 256(1)(b) of the Act, two corporations are associated with each other if they are both controlled, directly or indirectly in any manner whatever, by the same person or group of persons. In addition, paragraph 129(6)(b) of the Act provides that when income from a source that is property is paid or payable by an associated corporation and deducted by the payor in computing its active business income it is deemed to be active business income in the hands of the recipient corporation. Accordingly, it is our view that amounts paid for rent and deducted in computing active business income by the professional corporation would be deemed to be active business income in the hands of the rental corporation.
You have also asked if, in the second example, the corporation associated with the rental corporation was one other than a professional corporation. Subsections 129(6) and 256(1) of the Act do not contain any provision that would exclude certain types of corporations. Accordingly, it is our view that it does not matter in determining if there is a specified investment business the type of corporation associated with the corporation under consideration.
We trust this information is helpful.
Yours truly,
Charles Rafuse
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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