25 October 1994 External T.I. 9425835 - SBC USE OF RELESTATE AS CO-TENANT

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:Determination of primary use of real-estate held by a co-tenant

Position TAKEN:the use of the building as a whole must be looked at

REASON FOR POSITION:co-tenants generally own an interest in the whole and not in a specific part of a building.

XXXXXXXXXX		5-942583

Attention: XXXXXXXXXX

October 25, 1994

Dear Sirs:

Re: Definition of a Small Business Corporation

This is in reply to your letter of October 4, 1994 in which you requested a technical interpretation of the definition of a Small Business Corporation (an "SBC") as defined in subsection 248(1) of the Income Tax Act (the "Act") as it reads in relation to the application of subsection 4900(12) of the Income Tax Regulations (the "Regulations").

In particular, you wish to know if the Department would accept the view that a corporation is using a building principally in an active business where the corporation owns a 50% co-tenancy interest in the building, substantially all of the value of the corporation's property consists of the building, it uses over 50% of its proportionate interest in the building in an active business and the remaining co-tenants are at arm's length. For example, could a corporation qualify as an SBC if it owns a 50% interest in a 100,000 square foot building and uses 40,000 square feet of the building in an active business.

The definition of an SBC in subsection 248(1) of the Act provides that all or substantially all of the assets of a corporation must be used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it. Furthermore, as stated in paragraph 5 of Interpretation Bulletin IT-486R, it is the Department's view that an asset is used principally in a business if more than 50% of its use is in respect of that business.

In the situation you have described, the corporation and the other owners of a building 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 its share of all areas. It is also our understanding that while an agreement may exist to establish occupation rights between owners in such situations, in general this will not affect the form of ownership. Accordingly, and notwithstanding the fact that the corporation may use most of its proportionate interest in the building in its active business, if less than 50% of the building's total value is being used in an active business carried on by the corporate owner the corporation will not qualify as an SBC.

We trust that these comments will be of assistance.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch