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: 1. Whether, for the purposes of the exclusion in paragraph (b) in the definition of "specified investment business" (SIB) in subsection 125(7) of the Act, the associated property management company must employ more than five full-time employees per corporate co-owner of the commercial real estate rental properties under its management. 2. For the purposes of the paragraph (b) SIB exclusion, whether the associated property management company is considered to be in the same business as the corporate co-owners of the commercial real estate rental properties. 3. Whether a corporation has carried on an active business as a member of a partnership.
Position: 1. No. 2. No. 3. Yes.
Reasons: 1. The test is whether it can be reasonably expected that a particular corporation that received services from an associated corporation would otherwise have required more than 5 full-time employees in its business had the services not been provided. 2. The business of the corporate co-owners is to derive income from property in the form of rent, which is a different business than that of the associated corporation, which is to provide property management services. 3. Paragraph 20 of IT-73R6.
XXXXXXXXXX 2008-028468
Tim Fitzgerald, CGA
January 20, 2009
Dear Sirs,
Re: Specified Investment Business
This is in reply to your letter of June 16, 2008 concerning the definition of "specified investment business" ("SIB") in subsection 125(7) of the Income Tax Act (Act) as it would apply in two scenarios where certain Canadian resident individuals that are members of a family own shares in 3 holding companies, Holdco #1, Holdco #2 and Holdco #3
Scenario 1
In this scenario, each property is structured as a separate co-ownership. For example, the corporate co-owners of Property #1 are Holdco #1, Holdco #2 and Holdco #3 and the corporate co-owners of Property #2 are Holdco #1 and Holdco#2. The co-owners carry on business as members of a joint venture, the purpose of which is to derive income from property in the form of rent. You have specified that none of the holding companies are currently eligible for the small business deduction (SBD) because their income is from a SIB.
With the intention of qualifying for the SBD, the co-owners intend to set up a corporation ("Newco") that will be associated with each co-owner. Newco will employ throughout the year more than 5 full-time employees and its business will be to provide exclusively for the co-owners of the properties such property management services as building repairs, leasing services and financial management services.
Your first question is whether the Canada Revenue Agency (the "CRA") would consider it necessary that more than 15 full-time employees be employed in the business of Newco, the associated property management company, in order for the exclusion in paragraph (b) of the definition of SIB in subsection 125(7) of the Act to be met by each of the co-owners.
Secondly, you would like to know whether the CRA would consider the employees of Newco to be in the same business as that of the holding companies for the purposes of the paragraph (b) exclusion mentioned above.
Scenario 2
In this scenario, the properties are owned in a partnership arrangement. For instance, four commercial real estate rental buildings are owned by a partnership the interests of which are held by Holdco #1, Holdco #2 and Holdco #3. The partnership employs directly in its business throughout the taxation year more than 5 full-time employees. The primary purpose of the partnership is to derive income from property in the form of rent.
In reference to this scenario, you asked whether Holdco #1, Holdco #2 and Holdco #3 would each be considered to be carrying on an active business as a member of a partnership.
Our Comments
As explained in Information Circular 70-6R5 it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Although we are unable to provide any binding assurance with respect to the interpretations requested, we offer the following general comments, which we trust will be of some assistance.
A SIB, defined in subsection 125(7) of the Act, generally means a business carried on by a particular corporation in a taxation year whose principal purpose is to derive income from property, such as rental income, unless the corporation meets one of two conditions:
(a) the particular corporation employs in the business throughout the taxation year more than 5 full-time employees; or
(b) another corporation associated with the particular corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the particular corporation in the year and it is reasonable to assume that the particular corporation would have required more than 5 full-time employees in its business if those services had not been provided.
In Scenario 1, it is the exception in paragraph (b) above that is relevant in determining whether the business of each of Holdco #1, Holdco#2 and Holdco #3 is a SIB. In answer to your first question, the test to be met for the SIB exclusion in paragraph (b) above is not that Newco employed more than 5 full-time employees per corporate co-owner of the properties under its management; rather, the test to be met is that it could reasonably be expected that the particular corporation (i.e., the co-owner) would have required more than 5 full-time employees in its business had the property management services not been provided by the associated company, Newco. Such a determination would have to be made on the basis of the facts for each corporate co-owner or joint venturer (i.e., Holdco #1, Holdco #2 and Holdco #3).
In answer to your second question concerning Scenario 1, we do not consider the corporate co-owners or joint venturers (Holdco #1, Holdco #2 and Holdco #3) to be in the same business as that of the associated property management corporation, Newco, because the business of the holding companies is to derive income from property in the form of rent, whereas Newco is in the business of rendering property management services.
With regard to Scenario 2 above, the determination of whether a corporation's share of the business income of a partnership is from an active business is made at the partnership level. Paragraph 20 of IT-73R6 - The Small Business Deduction indicates that the CRA considers a business carried on by a corporation as a member of a partnership not to be a SIB if the partnership employs more than five full-time employees, and that, accordingly, the corporation's share of the income from the business can be included in the calculation of its "specified partnership income" ("SPI"). Therefore, in our view, the business carried on by each of Holdco #1, Holdco #2 and Holdco #3 as a member of the partnership in Scenario 2 is not a SIB because the partnership employs in its business more than 5 full-time employees. Each corporate partner's share of the partnership's income would be included in its calculation of SPI for the purposes of computing its SBD for the year.
Our comments above are based on the limited facts presented in your hypothetical scenarios. Since these determinations always involve question of fact and law, we might have a different view once all the relevant facts in any given scenario were available.
In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the CRA.
We trust our comments are helpful.
Yours truly,
Sandy Parnanzone
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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