21 October 1994 External T.I. 9422195 - CAPITAL GAINS EXEMPTION

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 an active business is carried throughout a 	taxation year where there is a seasonal temporary 	closure of operations of a business done on a recurring 	basis?

2. Whether the operation of a motel is a business?

Position TAKEN:

1. A seasonal temporary closure of operations done on a 	recurring basis does imply that an active business has, 	notwithstanding such a seasonal closure, been carried 	on throughout the year.

2. Normally, a full-service motel operation constitutes a business.

Reasons FOR POSITION TAKEN:

1. IT-73R4 paragraph 6, 5-7575

2. IT-73R4 paragraph 12, 5-933293

			5-942219
XXXXXXXXXX	Robert Gagnon

Attention: XXXXXXXXXX

October 21, 1994

Dear Sirs:

Re: Qualified Small Business Corporation Shares

This is in reply to your letter of August 25, 1994 wherein you requested a technical interpretation concerning the status of shares of a corporation as qualified small business corporation shares as that phrase is defined under subsection 110.6(1) of the Income Tax Act ("Act").

The situation outlined in your letter appears to involve actual proposed transactions with identifiable taxpayers. As indicated in Information Circular 70-6R2, we do not express opinions on specified proposed transactions other than as a reply to an advance income tax ruling. Moreover, the Department does not give rulings where a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request for an advance ruling. While we are unable to comment on the income tax consequences attendant on the specific facts described in your letter, the following general comments may be of assistance to you.

For the purposes of determining whether a share is a qualified small business corporation share, subsection 110.6(1) of the Act requires, inter alia, that at the determination time the share in question be one of a small business corporation as defined in subsection 248(1) of the Act and that throughout the 24 months immediately preceding the determination time, the share was one of a Canadian-controlled private corporation more than 50% of the fair market value of the assets of which was attributable to assets used in an active business carried on primarily in Canada.

The question of whether or not an active business is carried on is a question of fact. Interpretation Bulletin IT-459 provides in paragraph 3 that where the phrase "carrying on" a business is used in the Act, a determination will be made based upon the degree of activity in light of the particular facts.

As stated in paragraph 6 of Interpretation Bulletin IT-73R4, a temporary period of inactivity does not necessarily mean that a corporation has ceased (and subsequently recommenced) to carry on a business. It is our view that a seasonal temporary closure of operations of a business done on a recurring basis, does imply that an active business has, notwithstanding such seasonal closure, been carried on throughout the business taxation year. However, whether or not such a conclusion is warranted will depend upon all the circumstances.

In determining whether the operation of a motel by a corporation is a business or not, the number and kinds of services it provides is the dominant factor. Interpretation bulletin IT-73R4 provides in paragraph 12 that a corporation which operates a hotel is generally considered to be in the business of providing services and not in the business of renting property; accordingly, the business is considered to be an active business rather than a specified investment business. It is our opinion that normally a full-service motel operation would be providing a sufficient level of services such that it would not be considered to constitute a business the principal purpose of which is to derive income from property.

The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch