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.
Principal Issues:
Whether a corporation operating XXXXXXXXXX would qualify as a "small business corporation".
Position TAKEN:
Question of fact. However, corporation would be considered to be carrying on an active business.
Reasons FOR POSITION TAKEN:
Corporation is neither a personal services business nor a specified investment business within the meaning of subsection 125(7).
5-950121
XXXXXXXXXX C. Chouinard
March 31, 1995
Dear Sir:
Re: Small Business Corporation
We are writing in response to your letter of January 6, 1995, wherein you requested our comments on the definition of "small business corporation" in subsection 248(1) of the Income Tax Act (the "Act").
More specifically, you ask whether a corporation that operates XXXXXXXXXX would constitute a "small business corporation" within the meaning of subsection 248(1) of the Act. You indicate that more than 90% of the fair market value of the assets of the corporation consist of land and buildings and that the camp provides the following services and facilities: a clubhouse with lounge, recreation room, snack bar, heated swimming pool, whirlpool and sauna, a children's playground and pool, tennis and volleyball courts, 125 campsites for trailers and campers (seasonally available), motel units and sunbathing and picnic areas. You also indicate that more than 90% of the income of the corporation is from membership fees to use the facilities and services provided by the camp.
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.
In order to qualify as a "small business corporation" within the meaning of subsection 248(1) of the Act, all or substantially all of the fair market value of the assets of a corporation must, at that time, be used principally in an active business carried on primarily in Canada. "Active business" is defined in subsection 248(1) of the Act as any business carried on by a taxpayer resident in Canada, other than a "specified investment business" or a "personal services business". These latter two terms are defined in subsection 248(1) of the Act and derive their meanings from definitions in subsection 125(7) of the Act. The definition of interest in this case is that of "specified investment business". A "specified investment business" carried on by a corporation means a business whose principal purpose is to derive income from property, such as rental property, unless the corporation employs in the business throughout the year more than five full-time employees.
In the situation you describe, the issue of whether the corporation is operating a "specified investment business" is relevant as regards the motel and the campsites for trailers and campers. In determining whether the operation of a motel by a corporation is an active business, the number and kind of services it provides is the dominant factor. Interpretation Bulletin IT-73R4 provides in paragraph 12 that a corporation which operates a hotel is generally considered to be in the business of providing services and not in the business of renting property. Accordingly, the business is considered to be an active business rather than a specified investment business. It is our opinion that normally a full-service motel operation would be providing a sufficient level of services such that it would not be considered to constitute a business whose principal purpose is to derive income from property. With respect to the campsites for trailers and campers, we have previously taken the position with respect to a corporation having less than six full-time employees, operating a trailer court and offering no more than normal services such as grounds maintenance and snow removal, that it would be considered to be conducting a specified investment business.
Since it is a question of fact whether a particular corporation is a "small business corporation", we cannot comment specifically on your query. However, in a situation where the use of camp facilities and the provision of numerous related services are available to members in consideration for membership fees, in our view, the corporation would generally be considered to be carrying on an active business.
As stated in paragraph 6 of Interpretation Bulletin IT-73R4, a temporary period of inactivity does not necessarily mean that a corporation has ceased (and subsequently recommenced) to carry on a business. It is our view that a seasonal temporary closure of operations of a business done on a recurring basis, does imply that an active business has, notwithstanding such seasonal closure, been carried on throughout the business taxation year. However, whether or not such a conclusion is warranted will depend upon all the circumstances.
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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