5 November 2009 External T.I. 2009-0307931E5 - Asset used principally in an active 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.

Principal Issues: Is a building used principally in an active business if it is partially used to earn rental income?

Position: Question of fact. General comments provided.

Reasons: The "used principally" test is applied on a property by property basis.

									2009-030793
XXXXXXXXXX 								S. Kim
(613) 952-1506
November 5, 2009

Dear XXXXXXXXXX :

Re: Asset Used Principally in an Active Business

This is in reply to your undated letter (received on January 27, 2009) and is further to our telephone conversation (Kim/XXXXXXXXXX ) concerning the determination of whether or not a building is being used principally in an active business for the purpose of the definition of a "qualified small business corporation share" ("QSBCS") in subsection 110.6(1) of the Income Tax Act (the "Act").

You described a situation where a Canadian-controlled private corporation that carries on an active business in Canada ("Ownerco") owns a building (the "Building") that it partially occupies as its headquarters and rents out the remainder to arm's length tenants.

The Building is divided into six equal parts that represent the rentable areas. Each of the rentable areas commands a different rate of rent per square foot depending on whether it faces a "spectacular view" (highest rent), a "pleasant street view", or an "unpleasant lane view" (lowest rent).

You provided hypothetical scenarios where Ownerco would occupy more than one rentable area and the combination of the rentable areas occupied by Ownerco results in one the following:

1. Ownerco would occupy more than 50% of the total rentable space in the Building and, were it required to pay rent, would pay more than 50% of the total rent that could be earned from renting the entire Building, or

2. Ownerco would occupy more than 50% of the total rentable space in the Building and, were it required to pay rent, would pay less than 50% of the total rent that could be earned from renting the entire Building, or

3. Ownerco would occupy less than 50% of the total rentable space in the Building and, were it required to pay rent, would pay more than 50% of the total rent that could be earned from renting the entire Building.

You enquired whether Ownerco is using the Building principally in an active business in any of the above three scenarios for the purpose of the definition of a QSBCS in subsection 110.6(1) of the Act.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments which may be of assistance.

An individual who realizes a taxable capital gain on the disposition of a share that is a QSBCS, as defined in subsection 110.6(1) of the Act, may be entitled to a capital gains deduction in calculating taxable income pursuant to subsection 110.6(2.1) of the Act.

The share must be a "small business corporation" ("SBC") share at the time of disposition and at least 90% of the fair market value of the corporation's assets attributable to, inter alia, assets that are used "principally in an active business" carried on primarily in Canada.

The term "principally" generally means more than 50%. We generally regard an asset which is used more than 50% in an active business as one that is "used principally in an active business". Generally, an asset is considered to be used principally in an active business if its primary or main use is in that business. The "used principally" test is applied on a property by property basis.

It is a question of fact whether a property is used principally in an active business. Although there are no set guidelines as to which factors to use in different situations, there are two aspects to be considered in determining the nature of use of a building - quantitative factors (e.g., the total square footage occupancy in the building) and qualitative factors (e.g., the original intent for purchasing the building, actual use to which the building is put in the course of the business, the nature of the business involved and the practice in the particular industry).

The square footage use of a building is generally accepted as a factor to be given significant weight in the determination of the particular use to which the building is put. However, qualitative factors need also be considered. If the fair rental value of the space rented to tenants is greater than the fair rental value of the space used in an active business, this may indicate that a building is not used principally in an active business. Whether such a factor would be decisive in relation to the square footage test would have to be determined on a case by case basis. We are unable to provide a definitive comment without the opportunity to review all the relevant facts.

We trust that our comments are of assistance to you.

Yours truly,

Sandy Parnanzone
Section Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch