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.
Dear Sirs:
This is in reply to your letter of July 18, 1989, requesting a technical interpretation of whether the business of renting storage facilities and providing other related services to arm's length clients is an active business.
In your fact situation, the corporation does not engage more than five full time employees throughout the taxation year. Six or seven employees do, however, render the following services during the year:
XXX
You ask if the provision of such services on an ongoing basis is sufficient to characterize the corporation's income as active business income pursuant to the provisions of paragraph 125(7)(a) of the Act.
Whether a corporation engaged in providing rental storage facilities and other related services is carrying on active business or a specified investment business is a question of fact which can only be determined after an examination of all the relevant facts in the particular situation on a retrospective basis. If you are considering a proposed transaction, such a determination may be made provided an advance income tax ruling is requested in accordance with the procedures described in Information Circular 70-6R.
The following comments represent our opinion of the law as it applies generally.
Our Comments
The Department's position with respect to the small business deduction and the related issue of "active business" is set forth in Interpretation Bulletin IT-73R4. In this connection, we note that "active business carried on by a corporation" means any business carried on by the corporation other than a specified investment business or a personal services business.
With respect to the definition of a specified investment business, it should be noted that subparagraphs 125(7)(e)(i) and (ii) of the Act set out the conditions which must be met to be excluded from that definition. Thus, where a corporation carries on a business in a taxation year the principal purpose of which is to derive income from property and neither of the aforementioned conditions are met, it is our view that the corporation would be considered a specified investment business.
In your particular example the corporation, which appears to be deriving income from rents, does not employ throughout the taxation year more than five full-time employees nor does an associated corporation provide managerial, administrative, financial maintenance or other similar services which, if not provided would require the corporation to employ more than five full-time employees. Thus in our view, the exempting conditions of subparagraph 125(7)(e)(i) and (ii) have not been met and the corporation would appear to be a "specified investment business" rather than an active business.
As this view stems largely from our understanding of the "principal purpose" of the business you may wish to review the Department's comments in this respect in paragraphs 11, 12 and 13 of IT-73R4.
We trust our comments will prove helpful.
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© Her Majesty the Queen in Right of Canada, 1989
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© Sa Majesté la Reine du Chef du Canada, 1989
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