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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Qualified Small Business Corporation Shares
This is in reply to your letter of February 18, 1993 requesting a technical interpretation with respect to a particular hypothetical situation concerning the application of the term "small business corporation" as described in subsection 248(1) of the Income Tax Act (the "Act") and more specifically in its direct application to the above noted definition in subsection 110.6(1) of the Act.
Your hypothetical fact situation pertains to a motel involved in the business of renting rooms on a daily basis, presumably no monthly or long term rents are involved on a continuing basis. The chief shareholder is the only employee. No recreational facilities are associated with the motel but it does have a small coffee shop attached producing insignificant income.
Based on the above it is your view that the company operating the motel is a small business corporation since the income from the motel is in respect of services and not rental income. Thus it would not be a specified investment business and would be a qualified small business corporation for purposes of subsection 110.6(1) of the Act.
Since the matter outlined above appears to concern a specific taxpayer and a particular fact situation, matters which are more appropriately covered by an advance income tax ruling, we are unable to comment directly thereon. We will however attempt to provide you with some general comments on our position concerning a "specified investment business".
Our Comments:
According to the definition of "active business" in paragraph 125(7)(a) and in subsection 248(1) of the Act, "active business" means basically, any business carried on other than a specified investment business or a personal services business. If a business falls under the description of one or other of the two exceptions it is not an active business. Pursuant to paragraph 125(7)(e) of the Act where income is earned by a corporation through the carrying on of a business, "the principal purpose of which is to derive income from property", that business will be a specified investment business unless one of the subparagraph 125(7)(e)(i) or (ii) conditions is satisfied. The phrase "principal purpose" is not defined in the Act and therefore must be given its usual meaning with the result that this determination can only be made on the basis of all the relevant facts of a particular situation. As noted in paragraph 2 of Interpretation Bulletin IT-290 the word "principal" is considered synonymous with the words chief and main, however, for the purpose of paragraph 125(7)(e) it is the principal purpose of the business which must be considered rather than the principal business as discussed in IT-290. In our opinion since it is a purpose test which is involved in this provision all the relevant factors concerning the income earning process of a particular situation would have to be considered to determine whether or not the income derived constituted income from property, i.e., the source of the revenue would not necessarily be the only relevant factor in determining whether or not the revenue would constitute income from property.
In determining whether the principal purpose of a particular operation, such as a motel, is to derive income from property, the number and kinds of services it provides is the dominant factor. It is our opinion that normally a full-service motel operation would be providing a sufficient level of services such that it would not be considered to constitute a business the "principal purpose of which is to derive income from property."
We trust our comments will be of assistance to you.
Yours truly,
R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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