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:
The owners of a corporation are considering the sale of their business and one of the assets is partially used as a residence. They have enquiried whether this asset is an active asset or an inactive asset for the definition of a qualified small business corporation share (QSBCS).
Position TAKEN:
Question of fact when a residence is an active asset for QSBCS purposes. Based on the facts outlined in the submission we would generally agree that the asset is active.
Reasons FOR POSITION TAKEN:
Position taken in other files. The building, which partially contains the shareholder’s personal residence, still meets the business use test based on square footage (i.e. over 50% of the square footage of the building is used solely for the purpose of the active business). In addition, the residence, in this particular situation, is similar to a residence owned by a family farm corporation and is generally acknowledged to be used in an active business.
XXXXXXXXXX 5-990984
Attention:XXXXXXXXXX
July 23, 1999
Dear XXXXXXXXXX:
Re: Qualified Small Business Corporation
This is in reply to your letter of April 12, 1999, regarding the determination whether a corporate asset used partially by the shareholders as a residence is an active or inactive asset for the purposes of the definition of a “qualified small business corporation share” (“QSBCS”) in subsection 110.6(1) of the Income Tax Act (the “Act”).
We understand that the shareholders of a Canadian-controlled private corporation (the “corporation”) are considering the sale of their business and would like an opinion on whether one particular asset, a building, would qualify as an active business asset for QSBCS purposes. The corporation operates a XXXXXXXXXX store, including gas bar and XXXXXXXXXX. The shareholders reside in the rear of the store (the “living quarters”). The upstairs portion of the living quarters consists of one bedroom, bathroom, living room, dining room and a kitchen which is also used by the staff for meetings and food preparation. The downstairs portion of the living quarters has two storage rooms and two offices. The staff use these as a cloak room and dry cleaning is stored for pick-up. This level also has a laundry room and a bathroom which is available for employee use. The store is open 7 days a week from 7am to 10pm and XXXXXXXXXX shareholders are actively involved in the operations. You have also included a rough floor plan and pictures of the subject building.
Written confirmation of the tax consequences 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. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.
With respect to the above circumstances, the definition of “small business corporation” (“SBC”) 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 corporation or by a corporation related to it.” Paragraph (a) of the definition of “qualifying small business corporation share” (“QSBCS”) 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 issue, therefore, is whether the entire building can be considered as being used principally in an active business for the purposes of the SBC and QSBCS definitions.
The term “principally” is not a defined term. An asset which is used more than 50% in an active business is “used principally in an active business” and the entire value of such an asset may be used for the purposes of the “all or substantially all” or “more than 50%” requirement, as the case may be.
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 “used principally” test is applied on a property by property basis.
The fact that more than 50% of the space of a building is used in an active business by a CCPC (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. This factor along with the arguments you have raised with respect to paragraph 22 of Interpretation Bulletin IT-268R4 would seem to present a reasonable argument that the asset (i.e. the entire building) is used principally in an active business of the corporation. However, as mentioned above, the determination of “used principally in” is a question of fact and there are no set guidelines as to which factors to use in different situations.
As discussed in our telephone conversation (Wilson/XXXXXXXXXX), while it would be necessary to consider all the relevant facts and documentation of your situation (e.g. exact square footage measurements of the general store and the downstairs and upstairs portion of the living quarters) before a determination could be made, we would be pleased to consider it should you wish to request an advance income tax ruling once a sale of the shares is seriously contemplated.
We trust that these comments will be of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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