3 November 1993 Income Tax Severed Letter 9323425 - Capital Gains Exemption—Active Business Corporation

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                           932342
XXXXXXXXXX                                 Glen Thornley
                                           (613) 957-2101

Attention: XXXXXXXXXX

November 3, 1993

Dear Sirs:

Re: Capital Gains Exemption—Active Business Corporation

This is in reply to your letter of August 11, 1993 requesting a technical interpretation that a corporation which carries on a rental operation but employs more than 5 full-time employees, thereby qualifying as an active business corporation under paragraphs 125(7)(a) of the Income Tax Act (the "Act") is eligible for the capital gains exemption under section 110.6 of the Act.

In your view, presuming that the corporation also meets the 90 percent test and the 50 percent test, its shares would meet the definition of a "qualified small business corporation share" in section 110.6 of the Act, and it would be excluded from the definition of non-qualifying real property in subsection 110.6(1) of the Act. It is your further view that the sale of such shares would qualify for the enhanced capital gain deduction in subsection 110.6(2.1) of the Act.

OUR COMMENTS

The definition in subsection 110.6 of the Act of "non- qualifying real property" excludes in paragraph (b), a "qualified small business corporation share of the individual..." even though the fair market value of the share is derived principally from real property. The definition of "qualified small business corporation share" in that same subsection requires that the share be a share of a "small business corporation" in which more than 50% of the fair market value of the assets of which was attributable to assets used principally in an active business and the definition of "small business corporation" in subsection 248(1) also refers to "...assets...used principally in an active business".

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 the corporation, which is deriving income from rents, apparently employs throughout the taxation year more than five full-time employees, thus, the exempting condition of subparagraph 125(7)(e)(i) appears to have been met. If this is the case, the corporation would not appear to be a "specified investment business" but an active business and therefore its shares would be excluded from the definition of non-qualifying real property in subsection 110.6(1) of the Act.

In closing it should be noted that the Department's current position on what constitutes a full time employee is set out in paragraphs 14, 15 and 16 of Interpretation Bulletin IT-73R4 . In brief a full time employee is one who works a full business day (or a full shift) on each working day of the year, subject to normal absences due to illness or vacation. Part-time workers cannot qualify as full-time employees and two part-time employees will not be considered to be the equivalent of one full-time employee.

The foregoing comments represent the Department's view in this matter and as such are not to be construed as an advance income tax ruling.

We trust that our comments will be of assistance.

Yours truly,

Roberta Albert for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch