27 June 1990 Income Tax Severed Letter 59096 F - Capital Gains Exemption for QSBCS

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.

This is in reply to your letter of November 15, 1989 in which you requested our opinion on whether certain assets can be considered to have been "used in an active business" for the purposes of the definition of "qualified small business corporation share" (qsbcs) in subsection 110.6(1) and the definition of "small business corporation" (sbc) in subsection 248(1).

You are concerned about a situation where a corporation carries on an "active Business"(a fact upon which we do not comment) which involves a  24(1)

Our Comments

In our view, the issue of whether the residence and related land are "used In an active business" for the purposes of the sbc and qsbcs definitions requires among other things, that the residence be provided to the employee/manager in his capacity as an employee and not as a shareholder.  This is a question of fact.  The issue may also be determined on the basis of whether or not it is reasonable to regard the residence as being part of the business operation.  Factors that are relevant in making such a determination would include the type and size of the operation, the extent of involvement of the employee/manager in the day-to-day management of the operation, and the number of activities provided to customers requiring his Involvement or supervision.

As suggested by our comments, it may be possible for a residence and the related land located within a resort operation to qualify as having been used in an active business for the purposes of the sbc and qsbcs definitions.  We also note that where such is the case, the residence and related land would be accorded the same treatment as a farm residence that is viewed as having been usedin a farming business carried on by a corporation pursuant to comments in paragraph 29 of IT-268R3.

In connection with these comments, we have assumed that where the residence and related land can be regarded as having been used in a business, the residence and related land are typical of what would be provided to such an employee (i.e., not luxury accommodation), and that more than 50% of the residence is used directly in the business in question or as accommodation for theemployee/manager or his dependents.

As a final note you have indicated that the land related to the residence is not severed from the land used in the resort operation With respect to the Act, paragraphs of lT-486K indicates that the Department generally considers that an asset is used in a business if its primary or principal use (i.e., more than 50% of its use) is in respect of that business.

As a consequence of this position, it is our view that all the land would be regarded as being used in an active business for the purposes of the qsbcs and sbc definitions provided, of course, that it satisfied the primary or principal use test in paragraph 5 of IT-486R.

These comments represent our opinion of the law as it applies generally.  As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and, accordingly, it is not binding on Revenue Canada, Taxation.

We trust that these comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental   Affairs Branch