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 land held by a corporation for development purposes would be considered an asset used principally in an active business.
Position:
Although it is the Department's view that land inventory of a real estate developer which is used to carry on the business of land development is an asset used in an active business, it is not clear in this case that the land would so qualify.
Reasons:
Cannot determine whether corporation has commenced to carry on a business of land development.
5-961998
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
September 9, 1996
Dear Sir/Madam:
Re: Qualified Small Business Corporation Share - Subsection 110.6(1) of the Income Tax Act
We are writing in response to your letter of April 23, 1996, addressed to the XXXXXXXXXX Tax Services Office, which was forwarded to us for reply on June 3, 1996. You inquire whether a parcel of land held by a corporation for development would be considered to be an asset used principally in an active business for purposes of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Income Tax Act (the "Act") and the definition of "small business corporation" in subsection 248(1) of the Act. You also ask whether the corporation would be considered to be operating two businesses, namely, a property development business and a rental business.
In the situation you describe, two spouses own 10% of the shares of a corporation whose only significant asset is a large development property. The corporation is currently in the planning stages of development of this property and limited development activities have been underway for approximately two years. No lots have been sold by the corporation to date. The two spouses are considering selling their shares and question whether the shares of the corporation would qualify as "qualified small business corporation shares" within the meaning of subsection 110.6(1) of the Act.
In your view, since the corporation does not carry on a "specified investment business" and only carries on one business, a property development business, the shares would qualify as "qualified small business corporation shares".
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.
To qualify as a "qualified small business corporation share", a share must be, among other things, a share of the capital stock of a corporation which, at the relevant time (referred to as the "determination time"), is a share of a small business corporation, as defined in subsection 248(1) of the Act. The definition of "small business corporation" refers to assets of a Canadian-controlled private corporation that are used principally in an active business or assets that consist of shares of the capital stock or indebtedness of one or more small business corporations that are connected with the corporation.
The Department's position regarding income from an active business and the related issues concerning specified investment business and personal services business is provided in Interpretation Bulletin IT-73R4 (copy enclosed). The expression "active business" is defined in paragraph 125(7) and in subsection 248(1) of the Act, and includes any business carried on other than a specified investment business or a personal services business.
Pursuant to the definition of the expression in subsection 125(7) of the Act, a "specified investment business" carried on by a corporation means a business, "the principal purpose of which is to derive income from property" (for example, rental income), unless one of the conditions in subparagraph (a) or (b) of the definition is satisfied. The expression "principal purpose" is not defined in the Act. It must be given its usual meaning 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.
If an active business is carried on, it is a question of fact whether land purchased for future development is used principally in that active business. Generally, it is the Department's view that land inventory of a real estate developer which is used to carry on the business of land development is an asset used in an active business for purposes of the definition of "small business corporation", if the land inventory was acquired and is held for resale in the course of carrying on the business. However, given that only limited development activities have been undertaken by the corporation and that no lots have been sold to date, we question whether the corporation has commenced to carry on a land development business. In this respect, we refer you to Interpretation Bulletin IT-364, a copy of which is enclosed, which sets out the Department's views as to the date when business commences.
As regards your question with respect to the number of businesses carried on by the corporation, if the corporation has commenced to carry on a land development business, in our view, it would be considered to be carrying on only one business, as it does not appear from the information you have provided that the corporation is presently renting property.
In addition, given the principle established in the Fraser v. M.N.R., 64 D.T.C. 5334 (S.C.C.) case, the gain on the sale of shares of a corporation that holds land may, depending upon the circumstances, be an income gain or a capital gain. This could only be determined conclusively after a review of all of the relevant facts.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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