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.
Principal Issues:
1.Whether income earned by a CCPC that rents offices and provides management services is active business income?
2. Whether CCPC qualifies as a "small business corporation"?
Position TAKEN:
1.If the corporation is not a personal services business or a specified investment business, the income it earns may be considered active business income.
2.In order to qualify as a small business corporation, all or substantially all of the fair market value of the assets of the corporation must be attributable to assets used principally in an active business. An asset is used in a business carried on by the corporation if it is principally used in that business and at risk with respect to that business.
Reasons FOR POSITION TAKEN:
E9332545, E9028305, E930241A, E9332935
5-940982
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
July 21, 1994
Dear Sir:
Re: Subsection 248(1) - Small Business Corporation
Paragraph 125(7)(a) - Active Business Income
We are writing in reply to your letter of April 18, 1994 wherein you requested our comments regarding the definition of "small business corporation" in subsection 248(1) of the Income Tax Act (the "Act") and the application of paragraph 125(7)(a) of the Act.
The situation described in your letter involves a Canadian-controlled private corporation that owns two strata lots in an office building. Strata lot no. 1 represents less than 50% of the total floor space of both strata lots. Strata lot no. 2 represents more than 50%. Strata lot no. 1 is rented out to third parties, whereas strata lot no. 2 is used by a law partnership to which the corporation provides services such as the supply of trained staff, furniture, equipment and premises, accounting services and other management services. The law partnership pays an all inclusive monthly fee for these services which is greater than the rental income received from strata lot no. 1. The corporation and the law partnership do not deal at arm's length.
You ask whether the monthly fee received by the corporation from the law partnership constitutes active business income. In addition, you ask whether the corporation qualifies as a "small business corporation" on the basis that its assets are used principally in an active business.
Your request for a technical interpretation appears to relate to a situation which arose in respect of a specific taxpayer. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, a request for a written opinion on a completed transaction is generally considered by the taxpayer's local district office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following general 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. The Department has stated in paragraph 11 of IT-73R4, that the expression "principal purpose" is considered to be the main or chief objective for which the business is carried on. 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.
It is a question of fact dependent on all the details and circumstances whether a particular corporation is carrying on an "active business" or a "specified investment business", as those terms are defined in subsection 125(7) of the Act. Furthermore, as the Department stated in Question 30 of the 1981 Round Table of the Canadian Tax Foundation, it is possible for a corporation to carry on 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.
Whether a corporation that provides management services to a related professional practice is carrying on a business is a question of fact. However, the Department may question whether a management service corporation is in fact carrying on a business. This will be the case where there are not enough management service corporation employees to perform the functions in respect of which the professional practice is being billed or where the duties are performed or the services are rendered by employees of the professional practice or by the professionals themselves.
With respect to your second question, it is a question of fact, to be determined after a review of all the relevant circumstances, whether certain assets are used in an active business. Generally speaking, the Department will consider that an asset is used in a business carried on by it if it is principally used in that business and at risk with respect to that business. This implies that the risk must be more than a remote risk and that the use of the asset must go beyond simply using it for business purposes.
If, in order to qualify as a "small business corporation", the corporation effects a divisive reorganization such that, after the reorganization, the assets of the corporation consist solely of strata lot no. 2 and the furniture and equipment used by the law partnership, the corporation may qualify as a small business corporation if it is considered to be carrying on an active business.
Unless as otherwise stated, all references to statute are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.
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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