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:
Are assets used principally in active business?
Position:
The property may be considered an asset used principally in the business of farming in Canada.
Reasons:
If a portion of farm land is unusable (i.e. unsuitable for any use) or was required due to zoning restrictions and not put to any other use, generally that portion may not be considered when determining whether or not 50% of the property is used in active business.
5-960635
XXXXXXXXXX Karen Power, C.A.
Attention: XXXXXXXXXX
March 16, 1998
Dear Sirs:
Re: Assets used in active business
We are writing in response to your letter of February 14, 1996 wherein you requested our views on whether land owned by a taxpayer, is considered to be used principally in an active business for purposes of the definition of "qualified small business corporation shares" ("QSBCS") in subsection 110.6(1) of the Income Tax Act (the "Act") in the following two hypothetical situations. We apologize for the delay in replying.
Situation 1:
A person acquiring land (ie., a legal lot) that is necessary in order to carry on an active business may have no choice but to acquire more land than is physically necessary to carry on the business. This could occur due to local zoning regulations on minimum lot sizes and restrictions on maximum site coverage as a percentage of the land held, or possible the size of lot offered for sale by a vendor. The portion of the lot not actually used in the business cannot be disposed for any of the following reasons: zoning restrictions, that portion not being suitable for any use (for example, steep embankments, swampy areas, etc.) or the lack of any business or economic use to which that portion of property could be put. Because of this assumption, the fair market value of the excess portion would be less than the fair market value of the portion used in active business, if the lot could be subdivided.
Situation 2:
In some circumstances, a person may be required to own land that is not directly used in a business but is owned as a condition of carrying on a business. As an example, in British Columbia, a marina owner having a foreshore water lease is required under the terms of the lease to own one acre of land contiguous with the foreshore lease for every three acres of water lease. Such land is a condition precedent to operation of the marina.
It is your view, that in both of the above situations, the property - the lot or the land - is used principally in an active business, notwithstanding that a portion of the property may not actually be in physical use.
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. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.
In order for the shares of a corporation to qualify as QSBCSs, the corporation must be a small business corporation ("SBC") at the determination time and this necessitates, inter alia, the corporation meeting a test (the "90% test") regarding the current use of its assets. In order to meet this test, all or substantially all of the fair market value of the corporation's assets must be either; (1) assets which are used principally in an active business carried on primarily in Canada by the corporation (or by a corporation related to it), or (2) shares or indebtedness of one or more SBCs that are connected (within the meaning of subsection 186(4) of the Act on the assumption that the SBCs are "payer corporations") with the corporation.
It is a question of fact whether a property is used principally in an active business. Factors to be considered in determining whether a property is used in an active business include the actual use to which the asset is put in the course of the business, the nature of the business involved and the practice in the particular industry. 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. Her Majesty the Queen, (1986) 2 C.T.C. 459, 86 DTC 6521. The court held that the holding or using of property must be linked to some definite obligation or liability of the business and that a business purpose test for the use of the property was not sufficient. The property had to be employed and risked in the business and used to fulfil a requirement which had to be met in order to do business. In this context, risk means more than a remote risk. If the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business.
In our view, the phrase "used principally in an active business" can also be interpreted in the same manner as the phrase "used principally in the course of carrying on a farming business". Where reference is made to an asset being used "principally" in the business of farming, the asset will meet this requirement if more than 50% of the asset's use is in the business of farming.
In response to situation #1, the Department recognizes that a portion of the total area of a particular parcel of land may not be suitable for any use (ie., a portion may be absolutely useless for any purpose) as a result of any of the reasons described in situation #1. While the conclusion in any particular case would necessarily depend on all the facts of the case, generally, in such situations, the Department would not seek to deny that an asset had been used principally in an active business for purposes of the definition of "qualified small business corporation shares" in subsection 110.6(1) of the Act.
In response to situation #2, in our view, the land would be considered an asset used in an active business, because such land is a condition precedent (a requirement which had to be met in order to do business) to the operation of the marina.
We trust our comments will be of assistance to you.
Roberta Albert, C.A.
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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