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: Whether a corporation is a "small business corporation" ("SBC") pursuant to the definition in subsection 248(1).
Position: No.
Reasons: Subsection 129(6) does not apply to the definition of an SBC to recharacterize a specified investment business into an active business.
XXXXXXXXXX
2012-043510
Kathryn McCarthy CA
March 27, 2012
Dear XXXXXXXXXX :
Re: Definition of Small Business Corporation
This is in response to your letter of January 31, 2012, and further to our subsequent telephone conversation on March 21, 2012, (McCarthy/XXXXXXXXXX ) concerning the above-noted subject.
In your letter, you described a situation wherein a corporation ("PropertyCo") provides bare rentals of two industrial buildings, Buildings A and B. The "fair market value" ("FMV") of Buildings A and B is 1/3rd and 2/3rds, respectively, of the total FMV of PropertyCo's assets. Building A is rented to an arm's-length tenant; however, Building B is rented to a corporation ("Opco") that is associated and related to PropertyCo for the purposes of the Income Tax Act ("the Act"). PropertyCo and Opco are "Canadian-controlled private corporations", as that term is defined in subsection 125(7) of the Act. Opco uses Building B in its active business carried on primarily in Canada and the rental expense is deductible by Opco in computing income from that business. PropertyCo has no employees.
You have indicated that pursuant to subsection 129(6) of the Act, PropertyCo's rental income received from Opco would, for the purposes of, inter alia, section 125 of the Act, be deemed to be income of PropertyCo from an active business carried on by it in Canada. Therefore, since most of PropertyCo's income is deemed to be income from an active business, it is your view that the principal purpose of PropertyCo's business is not to derive income from property such that PropertyCo's business cannot be a specified investment business under subsection 125(7) of the Act. It is also your view that since PropertyCo is engaged in a single business, all or substantially all of the FMV of PropertyCo's assets is used principally in an active business carried on by it in Canada such that PropertyCo would be a "small business corporation" ("SBC") as that term is defined in subsection 248(1) of the Act.
Our Comments
In general terms, an SBC is defined in subsection 248(1) of the Act, at any particular time to mean, subject to subsection 110.6(15) of the Act, a Canadian-controlled private corporation where all or substantially all of the FMV of the corporation's assets is at that time attributable to assets that are:
a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
b) shares of the capital stock or indebtedness of one or more SBCs that are at that time connected with the particular corporation, or
c) assets described in a) and b) above.
For purposes of paragraph b) of the definition, an SBC must be connected with the particular corporation within the meaning of subsection 186(4) of the Act on the assumption that the SBC is at that time a "payer corporation" within the meaning of that subsection. Whether a particular corporation is an SBC under the Act at any particular time is a question of fact.
Subsection 129(6) of the Act deems income of a recipient corporation from a source in Canada that is a property to be income from an active business where such property income has been received from an associated corporation and such amount was or may be deducted in computing the income from that associated corporation from an active business carried on by it in Canada. However, this deeming rule only applies for the purposes of subsection 129(4) and section 125 of the Act and does not apply for the purposes of the definition of an SBC in subsection 248(1) of the Act.
Therefore, in the situation described above, since only 2/3rds of the FMV of PropertyCo's assets is currently attributable to assets that are used by it or Opco in an active business carried on in Canada, PropertyCo would not be an SBC.
We trust the foregoing comments are of assistance.
Yours truly,
Michael Cooke
Manager
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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