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:
Whether a mortgage taken back by a corporation on the sale of real property is an asset used in a business.
Position TAKEN:
The mortgage is not an asset used in a business.
Reasons FOR POSITION TAKEN:
Although a mortgage is an asset whose existence may be relevant to the equity of a corporation, it is not generally an asset used in an active business, as the funds tied up in the mortgage are no longer available for the active business uses of the corporation.
5-950110
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
March 31, 1995
Dear Sir:
Re: Mortgage Receivable - Used in a Business
We are writing in response to your letter of January 9, 1995, wherein you inquired whether a mortgage receivable would be considered an asset used in the business of farming for purposes of the definitions of "share of the capital stock of a family farm corporation" in subsections 70(10) and 110.6(1) of the Income Tax Act (the "Act"). You also ask whether it would be considered to be an asset used in an active business for purposes of the definition of "small business corporation" in subsection 248(1) of the Act.
In the situation you describe, a corporation which carries on a farming business owns real property that is encumbered by a mortgage and other indebtedness. In order to pay off that debt, the corporation sold a significant portion of the real property used in the business and took back a mortgage from the purchaser that was to be paid in full within a short period of time. Subsequent to the sale of the real property, the title to the land became the object of a lengthy and prolonged Aboriginal land claim dispute, that will ultimately be settled by the courts. As a result, the corporation is unable to enforce payment of the mortgage receivable and use the funds for their intended purposes. Upon receipt of the mortgage proceeds, the corporation intends to pay off existing debt obligations.
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. The following comments are, therefore, of a general nature only, and are not binding on the Department.
It is a question of fact, to be determined after a review of all the relevant circumstances, whether certain assets are used in a business. The relevant circumstances include the actual use to which the asset was put in the course of the business, the nature of the business involved and practice in the particular industry. The Supreme Court of Canada in the Ensite case (86 DTC 6521) considered the issue of whether property was used or held in the course of carrying on business and held that the proper test is whether the property is employed and risked in the business. A business purpose for the use of the property is not enough. The threshold of the test is met when the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations themselves. The test is not whether the taxpayer was forced to use the property to do business; the test is whether the property was used to fulfill a requirement which had to be met in order to do business.
As regards mortgages, it is the Department's view that, although a mortgage is an asset whose existence may be relevant to the equity of a corporation, it is not generally an asset used in an active business, as the funds tied up in the mortgage are no longer available for the active business uses of the corporation. However, mortgages may in certain circumstances be considered an asset used in an active business. For example, mortgages taken back by a developer in order to facilitate sales may initially appear to be assets used in an active business, but if such mortgages are retained for more than a short period, they appear to have become more in the nature of investments. In summary, mortgages having normal commercial terms and conditions and held as investments are not considered to be assets used in an active business.
Given our position above, in our opinion, the mortgage in the situation you describe would not be considered to be used in a business since the funds tied up in the mortgage are not available for the use of the corporation. Although the land claim dispute has caused the mortgage to remain outstanding for a longer period of time than was originally anticipated, our response would not be any different had the mortgage remained outstanding for a short period of time.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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