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.
933027
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
May 5, 1994
Dear Sirs:
Re: Subsection 110.6(1) of the Income Tax Act (the "Act")
This is in response to your letter of October 18, 1993, wherein you requested a technical interpretation of subsection 110.6(1) of the Act. You wish to know when an asset will be considered to be used in an active business for the purposes of subparagraph 110.6(1)(c)(i) of the definition of a "qualified small business corporation share".
In your letter you presented a situation in which a corporation has an undivided one-half interest in a building and uses half of the building as its business premises. The other co-owner of the building uses the remaining half of the building for its business. You have asked whether the corporation's one-half interest in the building would qualify as an asset used principally in the corporation's active business.
You have stated that if the corporation owned the entire building and used all of it as business premises the building would be an active business asset. However, it might be argued that since in law the corporation has an undivided one-half interest in the entire building, the building is not used principally in the corporation's active business because only one-half of the building is used as business premises.
It is your opinion that the better view is that the building would be an active business asset. You feel that this is consistent with the intention of the use of the word "principally" in the definition referred to above because to the extent the corporation's co-ownership interest in the building is used by the corporation, it is used to give it a right to occupy part of the building. While the corporation has an ownership interest in the entire building, its use of its ownership interest is to obtain the exclusive right to half of the building.
For the purposes of subparagraph 110.6(1)(c)(i) of the definition of a "qualified small business corporation share" more than 50% of the assets of the corporation referred to in that subparagraph must be attributable to assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it.
It is our view, as stated in paragraph 5 of Interpretation Bulletin IT-486R, that an asset is used in a business if its primary or principal use (ie. more than 50% of its use) is in respect of that business.
In the situation you have described it is our understanding that the corporation and the other owner each own an undivided interest in the property. Under this type of ownership, each co-tenant has a right to occupy the property in respect of all its areas and neither party can point to a particular part which represents his share of all areas. It is also our general understanding that while an agreement may exist to establish occupation rights between the two owners, it would not affect the form of ownership.
In light of the above comment on ownership and notwithstanding the fact that the corporation is using all of the space that it occupies in the building in its active business, it would appear that only 50% of its value in the building is being used in an active business carried on by the corporate owner. It would therefore appear that the more than 50% test would not be met in this case, unless the other owner was a related corporation. The fact that the other owner also uses all of the space that it occupies in the building in its active business, in and by itself, would have no bearing.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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