8 January 1993 Income Tax Severed Letter 9227765 - CGE—Non-qualifying Real Property

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.

922776
J.D. Brooks
XXXXXXXXXX
(613) 957-2103

January 8, 1993
Dear XXXXXXXXXX:

Re: Definition of Non-Qualifying Real Property

• This is in reply to your facsimile letter of September 23, 1992 in which you requested our interpretation of the proposed definition of non- qualifying real property which will be contained in subsection 110.6(1) of the Income Tax Act. You presented two hypothetical scenarios.
• In the first scenario, each of two unrelated individuals has a 50% undivided interest in real property which is leased to a corporation which uses the property to carry on its active business. Each of the two individuals owns 50% of the shares of the corporation. The second scenario differs from the first only in that the real property is held by the two individuals in a general partnership -- thus each individual still has a 50% interest in the real property (and neither person is a limited partner).
• Your concern focused on the fact that the two individuals are not related. In your view, it is an irrelevant fact that the individuals are not related since the test in clause (a)(ii)(F) of the definition of non-qualifying real property is met if each shareholder is an individual described in subparagraph (a)(ii). Similarly, it is your view that the real property owned by the individuals in the second scenario should also not be considered to be non-qualifying real property.

Our Comments

• In considering the first scenario, it is subparagraph (a)(ii) of the definition of non-qualifying real property which is relevant since that subparagraph deals with real property owned by an individual. Where the real property is used principally in an active business carried on by a corporation (otherwise than as a member of a partnership), clause (a)(ii)(F) of the definition requires that shares representing all or substantially all of the fair market value of all the issued and outstanding shares of its capital stock be owned by one or more persons described in subparagraph (a)(ii). Clause (a)(ii)(C) is described as "the individual (otherwise than as a member of a partnership)". The individual referred to is the individual described in the preamble of the definition of non-qualifying real property who disposed of the real property in question. It is our view that one can not interpret clause (a)(ii)(C) as a reference to more than one individual. Thus the real property described in the first scenario would be included in the definition of non-qualifying real property since the real property is owned jointly by unrelated persons.
• In considering the second scenario, it is subparagraph (a)(iii) of the definition of non-qualifying real property which is relevant since that subparagraph deals with real property owned by a partnership. Similar to the above conclusion, it is our opinion that the real property described in the second scenario would be included in the definition of non-qualifying real property since the real property is owned by a partnership of unrelated persons.
• These comments represent an expression of opinion and, as stated in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department. The comments are based on the proposed wording of the definition of non-qualifying real property in subsection 110.6(1) according to the Notice of Ways and Means Motion of June 19, 1992.

We trust these comments are of assistance.

Yours truly,
E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch