22 July 1998 External T.I. 9808635 - ASSETS USED IN AN ACTIVE BUSINESS

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 the entire value (fmv) of a building that is used principally in an active business would be included for purposes of the section 110.6 test (substantially all of the assets are used in an active business).

2) Factors in determining whether asset is used primarily for active business.

Position:

1) Asset by asset test with entire value being attributed to an asset used in an active business if it meets the used principally in an active business test.

2) It is a question of fact.

Reasons:

1) The test is on an asset by asset basis. Either an asset is used principally for business or it is not.

2)  Normally square footage results in a reasonable determination as to apportionment of use.  However, other factors must be taken into consideration.  This is a valuation situation.
		980863
XXXXXXXXXX 	A.M. Brake
(613) 957-2133

July 22, 1998

Dear XXXXXXXXXX:

Re: Assets Used In An Active Business

This is in reply to your letter of April 3, 1998, requesting our comments with respect to a corporation’s assets that are used principally in an active business comprising substantially all of the value of the corporation's assets. You asked two questions:

1) If a building is used more than 50% in an active business and the rest of the building is rented, will the entire building be considered to be used principally in an active business in meeting the 90% test and/or the 50% test for purposes of section 110.6 of the Income Tax Act (the "Act")?

2) Does the calculation of the business use percentage of a building need to be calculated on a square footage basis or on gross revenue, for purposes of section 110.6 of the Act? You feel that these methods can give very different results.

Although you have asked for a technical interpretation, the situation presented appears to be an actual fact situation. Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. However, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation (including company names and identification numbers) to the appropriate Tax Services Office for their comments. We are, however, prepared to provide some general comments.

Our Comments

With respect to the above circumstances, the definition of "small business corporation" in subsection 248(1) of the Act refers to "all or substantially all of the fair market value of the assets... is attributable to assets that are used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it." Paragraph (a) of the definition of "qualifying small business corporation share" in subsection 110.6(1) of the Act refers to "more than 50% of the fair market value of the assets of which is attributable to assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it."

The "used principally" test is applied on a property by property basis and if it is determined that a particular asset is used more than 50% in an active business, it would be the fair market value of the entire asset that would be included in determining whether "...all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are used principally in an active business." Alternatively, where an asset does not meet the "more than 50%" test, no amount would be included in determining the "all or substantially all" test. Whether an asset is used in an active business is a question of fact. Generally, the Department considers that an asset is used principally in an active business if its primary or main use is in respect of that business.

The fact that more than 50% of the space of a building is used in an active business by a Canadian-controlled private corporation (or a related corporation) is generally a strong indication that the building is used principally in an active business. In the Canada Trust Company decision (85 DTC 322), the Tax Court of Canada accepted the square footage use of a building as a factor to be given significant weight in the determination of the particular use to which a building is put. However, as mentioned above, the determination of "used principally" is a question of fact and there are no set guidelines as to which factors to use in different situations. We can not provide a definitive comment without the opportunity to review all the relevant facts. Generally, if the fair rental value of the space rented to tenants is greater than the fair rental value of the space used in an active business, this may indicate that the building is not used principally in an active business. Whether such a factor would be decisive in relation to the square footage test would have to be determined on a case by case basis.

This is a valuations situation and gross revenue from sales would not necessarily reflect the value of the different segments of the property.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, dated December 30, 1996, this is not an advance tax ruling and is therefore not binding on Revenue Canada.

We trust our comments will be of assistance to you.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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