30 January 1997 External T.I. 9642315 - ACTIVE BUSINESS V. ACTIVE BUSINESS INCOME

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:

1) Whether group of same partners (who deal at arm's length with each other) which controls two corporations causes the corporations to be "associated";
2) Whether income deemed to be income from an active business under paragraph 129(6)(b) is relevant for determining whether an active business is being carried on (qualified investment rule in Reg. 4900(12)(a), "small business corporation" def. in 248(1));
3) Whether shareholder partners and spouses (all of whom deal at arm's length with each of the other except their own spouse) deal at arm's length with the corporation which partners as an unrelated group control;

4) Whether investing less than $25,000 in RRSP causes shares of the "connected shareholder" or "designated shareholder" to be "qualified investments"; 5) whether RRSP of connected or designated shareholder can exclusively hold shares worth less than $25,000 or whether other properties must be held also.

Position:

1)Yes;
2) No;
3)Question of fact;
4)No, must be less than $25,000 held both inside & outside RRSP and by related persons;

5)RRSP can hold 100% in shares of "eligible corporation" or "small business".

Reasons:

1)Words of 256(1)(b);
2)Routine - E55070;
3)Routine;
4)Words of "exempt person" definition within "connected" and "designated" shareholder definitions in 4901(2);

5)Nothing in Act limits proportion of single type of "qualified investment" which can be held inside an RRSP.

XXXXXXXXXX 964231

Attention: XXXXXXXXXX

January 30, 1997

Re: Subsections 4900(6) and (12) of the Income Tax Regulations (the "Regulations")

This is in reply to your letter of December 18, 1996, in which you ask us several questions concerning the above-noted provisions as they might apply to a specific fact situation.

We are unable to provide our opinion concerning a proposed transaction except in the context of an advance income tax ruling. We may provide, however, the following general comments which are not binding on the Department.

1. Where a group of 7 partners has the ability to control Corporation A and the same group of 7 partners also has the ability to control Corporation B, we agree that the Corporations A and B are "associated corporations" as provided by paragraph 256(1)(b) of the Income Tax Act (the "Act"). Note that it is irrelevant that a group of fewer partners is able to exercise control of one of the corporations.

2. Where Corporation A carries on an "active business" as defined in subsection 248(1) of the Act and pays rental income to Corporation B, the rental income earned by Corporation B is deemed to be income from an active business pursuant to paragraph 129(6)(b) of the Act, if the rental expense is deductible by Corporation A in computing its income from an active business.

However, this does not mean that Corporation B is in fact carrying on an active business. It is the Department's view that the deeming provision in subparagraph 129(6)(b)(i) does not change the type of activity that a company is carrying on. Whether Corporation B is carrying on an active business (for purposes of the qualified investment rules in paragraph 4900(12)(a) of the Regulations) or carrying on a specified investment business is a question of fact which can only be determined after an examination of all the relevant facts in the particular situation.

For the purposes of the definition of "small business corporation" and, thus, paragraph 4900(12)(a) of the Regulations, an "active business" is generally defined as any business carried on by a taxpayer other than a "specified investment business" or a "personal services business". A "specified investment business" is defined as a business the principal purpose of which is to derive income from property including such income as interest, dividends, rent and royalties. Gains from the disposition of real property may or may not be from an active business. For further information on these two defined terms please refer to IT-73R4 which is available from your local tax services office.

3. Paragraph 251(2)(b) of the Act describes persons who are considered to be related to a corporation. If an individual is not a person described in that paragraph, it is a question of fact whether an individual deals at arm's length with a corporation.

4. Where an annuitant of a registered retirement savings plan ("RRSP") would be a "connected shareholder" or "designated shareholder" of a corporation as defined in subsection 4901(2) of the Regulations, but for the fact that the annuitant is an "exempt person", a share of that corporation may still be a qualified investment for the RRSP. An "exempt person" is defined in paragraph (b) and subparagraph (a)(ii) of, respectively, the definitions of "connected shareholder" and "designated shareholder". The person must deal at arm's length with the corporation and the cost amount of all the shares (basically the shares of the corporation and of any related corporations owned directly or indirectly by the RRSP annuitant or a related person, and any such shares the RRSP annuitant or a related person has a right to acquire) is, in total, less than $25,000. For this purpose, an annuitant of an RRSP is deemed to own the shares owned by the RRSP (see definition of "specified shareholder" in paragraph 248(1)(b) of the Act which is made applicable by virtue of the definitions of "connected shareholder" and "designated shareholder" in subsection 4901(2) of the Regulations).

With respect to a qualified investment under paragraph 4900(12)(a) of the Regulations, should the corporation fail to remain a "small business corporation" or the annuitant become a "connected shareholder" at a later time the shares will not consequently become non-qualified investments for the RRSP. In accordance with subsection 4900(13) of the Regulations a share of a "small business corporation" will become non-qualified, however, if:

(i) an individual provides services to or for, acquires goods from, or is provided services by, the issuer of the share or a person related to the issuer;

(ii) an amount is received by the RRSP in respect of the share; and

(iii) the amount can reasonably be considered to be

(A) on account of or in lieu or in satisfaction of, payment for the services to or for the issuer or the person related to the issuer, or

(B) in respect of the acquisition of the goods from, or services provided by, the issuer or the person related to the issuer.

5. If the shares are qualified investments for an RRSP pursuant to subsection 4900(6) or (12) of the Regulations and the annuitant is an "exempt person", there is no requirement that the shares constitute less than a certain percentage of the total value of the RRSP's holdings. In other words there is nothing in the Act to prohibit an RRSP from investing 100% in such shares in these circumstances.

Due to the detail and complexity of the Regulations regarding these issues, the foregoing comments are meant only to provide an overview of the relevant provisions and under no circumstances should they be considered either comprehensive or all inclusive.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch