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.
Principal Issues: Whether the activity of a corporation is considered to be an active business, required for compliance with the definition in subsection 110.6(1) of "qualified small business corporation share", or a "specified investment business".
Position: The activity is considered to be a "specified investment business".
Reasons: It is indicated that the corporation's only business is to receive royalty payments and it has not been indicated that it has more than 5 full-time employees throughout the year.
XXXXXXXXXX
2011-039801
Charles Rafuse
613-247-9237
April 11, 2011
Dear XXXXXXXXXX :
Re: Active Business
This is in response to your fax of February 11, 2011, concerning your request for our comments on whether a business is an "active business" or a "specified investment business".
You have indicated that a corporation, which owns a gravel pit, has an exclusive contract with one customer who is entitled to remove sand and gravel from the pit. The customer pays a royalty to the corporation of $ .43 to $2.12 per ton of material removed from the pit depending on the size and quality of the material with an annual minimum royalty payment. The customer is required to pay all business taxes, licenses and permits for the pit operation and uses its own personnel, equipment and vehicles to remove the materials. The corporation has no other income or expenses outside of this activity and, we presume, does not employ more than five full-time employees.
You have asked for a written opinion on whether this activity of the corporation is considered to be an "active business", required for compliance with the definition of "qualified small business corporation share" in subsection 110.6(1) of the Income Tax Act (Act), or a "specified investment business".
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to make the general comments set out below, which may be of assistance.
An individual who realizes a taxable capital gain on the disposition of a share that is a "qualified small business corporation share", as defined in subsection 110.6(1) of the Act, may be entitled to a capital gains deduction in calculating taxable income pursuant to subsection 110.6(2.1) of the Act. Subsection 110.6(1) of the Act defines "qualified small business corporation share" and requires inter alia that it be a share of the capital stock of a small business corporation.
Subsection 248(1) of the Act defines "small business corporation" as:
"...a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are:
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
(b) shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation ... or
(c) assets described in paragraphs (a) and (b)..."
Subsection 248(1) of the Act also defines "active business" as:
"in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business".
The expression "specified investment business", which is defined in subsection 248(1) by referring to the definition of the same expression in subsection 125(7) of the Act, means a business carried on by a corporation
"... (other than...a business of leasing property other than real property) the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property but...does not include a business...where:
(a) the corporation employs in the business throughout the year more than 5 full-time employees, or
(b) any other corporation associated with the corporation provides...managerial... or other similar services to the corporation...and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided".
Based on the above, we are of the view that the business carried on by the corporation is a "specified investment business" and its shares would thus not meet all the requirements of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Act. We have taken this position because it is indicated that the corporation's only business is to receive royalty payments and it does not have more than 5 full-time employees throughout the year.
We trust that these comments will be of assistance.
Yours sincerely,
S. Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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