14 March 1994 External T.I. 9332545 - QUALIFYING SMALL BUSINESS CORPORATION SHARE

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.

Rulings Directorate
Correspondence Summary

Principal Issues:

Is a residence rented to an employee an asset used in an active business for purposes of the definition of a Qualifying Small Business Corporation Share in subsection 110.6(1)?

Position TAKEN:

Depends of the facts of the case. If necessary for financial survival of the corporation and used more than 50% in the active business.

Reasons FOR POSITION TAKEN:

5-933292, 5-932891, 5-930553, 7-903654, 5-2741, 5-923567, 5-930199, 5-922056, 5-920191

FINANCE OPINION:

none

JURISPRUDENCE:

Ensite Limited v The Queen 86 CTC 459 (SCC)

RCT PUBLICATIONS:

IT-268R3 par 29
IT-486R par 5
IT-206R
Question 30 Round Table 1981

HAA NUMBER:

5102-9-2

XXXXXXXXXX 5-933254

Attention: XXXXXXXXXX

March 14, 1994

Dear Sirs:

Object: Qualifying Small Business Corporation Share
Paragraph 110.6(1) of the Income Tax Act

This is in response to your letter of November 1, 1993, requesting the Department's view as to whether or not a particular real property interest would qualify as an asset used in an active business for purposes of the definition of a Qualifying Small Business Corporation Share in subsection 110.6(1) of the Income Tax Act. In this letter, all references to statute are to the Income Tax Act S.C. 1970-71-72,c.63 as amended consolidated to June 10, 1993 (the "Act").

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

It is a question of fact whether an asset is used in an active business. The definition of "qualified small business corporation share" in subsection 110.6(1) of the Act reads, in part, as follows:

"... more than 50% of the fair market value of the assets of which was attributable to

(a)assets used principally in an active business..."

The question to be addressed is whether the assets or property are "used" in an active business. The issue of whether property was used or held by a corporation in the course of carrying on a business was considered by the Supreme Court in Ensite Limited v. the Queen, 1986 CTC 459. The Court held that the holding or using of property must be linked to some definite obligation or liability of the business. A business purpose test for the use of the property was not enough. The test was whether the property was used to fulfil a requirement which had to be met in order to do business. The threshold of the test was met when the withdrawal of the property would "have a decidedly destabilizing effect on the corporate operations themselves".

The Department stated in Question 30 of the 1981 Round Table of the Canadian Tax Foundation Conference that a corporation may carry more than one business, one of which may give rise to income from an active business and another which may give rise to income from a specified investment business. The guidelines used in determining whether a corporation has carried on two or more separate businesses are set forth in IT-206R.

As explained in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust the above comments will be of assistance to you. If you have any other questions do not hesitate to contact us.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate