18 December 1990 Administrative Letter 903096 F - Specified Investment Business Rules

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.

19(1)

December 18, 1990

Dears Sirs:

Re:  Specified Investment Business Rules

This is in reply to your letter of November 19 1990, requesting our views on whether the leasing of real property, in the following hypothetical situation would constitute "a business" for the purposes of the specified investment business rules as set out in paragraph 125(7)(e) of the Income Tax Act (the "Act"). The hypothetical facts given are as follows:

1.     Company X is a Canadian corporation which owns the issued common shares of a wholly-owned subsidiary company ("company Y") and the real estate from which company Y conducts certain of its business operations.

2.     Company Y is engaged in providing storage facilities (i.e. locker unit space) and related ancillary services to arm's length clients. Company X leases its real property to Company Y from which location this subsidiary company derives its locker service income.

3.     Company Y also owns a rental apartment building from which it earns net rental income.

4.     Company Y employs six full-time employees engaged in various facets of both the storage facility and apartment rental operations. Certain employees are engaged in providing janitorial services, accounting and general management services to the operations of the storage facility and apartment rental business.

5.     Company Y maintains only one bank account and general ledger for the operation of both the storage facility and apartment rental business.

Whether a corporation which provides rental storage facilities and other related services and apartment rentals, employing more than five full time employees is carrying on active business by virtue of the exemption in subparagraph 125(7)(e)(i) of the Act 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 it is possible to determine all the material facts and these facts can reasonably be expected to prevail and provided an advance income tax ruling is requested in accordance with the procedures described in information Circular 70-6R. However, we render the following by way of general comments.

Our Comments

With respect to the definition of a specified investment business, as you have noted, 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. Where on the other hand a company employs more than five full time employees but carries on two separate activities, the matter to determine is whether those activities are separate businesses or are considered one business.

The test as to whether separate businesses exist is found in Scales v George Thompson & Company Limited (1927), 13 TC 83. The court found it to be a question of fact whether or not different operations constitute one business or two separate businesses. At page 89 it further stated that the real question is whether or not there are any inter-connection, any interlacing, any inter-dependence, any unity at all embracing those two businesses.

Factors that are relevant in making such a determination are provided in paragraph 3 of Interpretation Bulletin IT-206R and include

(a)     the extent to which the two operations have common factors that say be pertinent,

(b)     whether the operations are carried in the same premises,

(c)     whether one operation exists primarily to supply the other,

(d)     whether the taxpayer's accounting system records the transactions of both operations as if they were those of one business, or whether separate complete set of records are maintained throughout the year.

In your particular example, based on the hypothetical facts given, the storage facilities and apartment rentals operations of company Y appear to be one business. If this is in fact the case, the specified investment business rules would not apply pursuant to the exemption accorded under subparagraph 125(7)(e)(i) of the Act.

As indicated, the above comments are only expressions of opinion on the application of the Income Tax Act to the hypothetical example and as such should not be construed as an advance income tax rulings, nor are they binding on the Department.

We trust our comments are of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch