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: Assets Principally Used in an Active Business
This is in reply to your letter of August 5, 1993 requesting a technical interpretation to determine whether a corporate owned house and land could be considered to be "assets principally used in an active business" as required in the definition of a "small business corporation" in subsection 248(1) of the Income Tax Act (the "Act") and in the definition of "Income of the corporation for the year from an active business" as set out in paragraph 125(7)(b) of the Act.
In your example, the corporation is a "Canadian-controlled private corporation" as defined in paragraph 125(7)(b) of the Act. It is in the business of charging fees to tenants for the use of land, i.e., charging rent on land owned by the company on which tenant's mobile homes are situated. The mobile home park includes hydro servicing equipment, cable television, street lighting, roadways, and sewage, storm sewer and water systems necessary to provide services demanded by park tenants.
The parcel of land also includes a house which is used by the shareholder/managers of the company as their permanent residence. An annual, fair market value rent is charged for the use of the home. Approximately 20% of the total square footage of the house is used by the corporation for its head office.
OUR COMMENTS
Whether or not particular assets are used principally in an active business is a question of fact which can only be determined after an examination of all the relevant facts on a retrospective basis. In this respect paragraph 5 of IT-486R outlines the Department's position concerning assets used in a business. In essence it states that an asset is used in a business if its primary or principal use (considered to be more than 50% of its use) is in respect of that business. Paragraph 29 of IT-268R says essentially the same thing, but in addition it deals specifically with a residence owned by a farm corporation.
Whether a corporation engaged in providing rental space for mobile homes is carrying on active business rather than a specified investment business is a question of fact which can also 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 70-6R2.
The Department's position regarding income from an active business and the related issue of specified investment business and personal services 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 conditions, one of 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, if the corporation, which is deriving income from rents, does not employ throughout the taxation year more than five full-time employees or an associated corporation does not 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, the exempting conditions of subparagraph 125(7)(e)(i) and (ii) will not have been met. Thus, the corporation, which provides no more than normally expected utility connections and minor other services, would appear to be a "specified investment business" rather than an active business. If this is the case, the house and land in question would not appear to be "assets principally used in 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.
Yours truly,
Roberta Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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