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:
Whether a residence attached to a store and office qualifies as an active business asset.
Position TAKEN:
May qualify, however, it is a question of fact.
Reasons FOR POSITION TAKEN:
Paragraph 29 of IT-268R3 would not apply in this situation. Paragraph 5 of IT-486R could apply depending on the facts. They may also be separate assets.
L. Barrows
XXXXXXXXXX 953332
Attention: XXXXXXXXXX
March 20, 1996
Dear XXXXXXXXXX:
Re: Qualified Small Business Corporation Shares ("QSBCS")
This is in reply to your letter of December 7, 1995 in which you requested an interpretation whether certain assets qualify for active business purposes.
Specifically, you describe a situation where the corporation owns a parcel of land which measures approximately 300 feet by 1400 feet and is improved by a house with an attached office and store. Business customers visit the office and store on a regular basis while the house is occupied by the shareholders of the corporation and their family.
We should advise that written confirmation of the tax implications inherent in a particular fact situation is only given by this Directorate when there is a proposed transaction which is the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2. In addition, where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, in response to your request, we can provide the following general comments which are not binding on the Department.
It is a question of fact whether an asset is used in an active business.
The definition of QSBCS in subsection 110.6(1) reads, in part, as follows:
"....more than 50% of the fair market value of the assets of which was attributable to
(i) assets used principally in an active business..."
The concern, therefore, is whether, and on what basis, assets (residence and attached store and office) may be regarded as being used in active business for purposes of the definition of QSBCS.
In our view, the phrase "used in active business" should be interpreted in the same manner as the phrase "used in the course of carrying on a farming business". Therefore, the criteria for determining qualification of a residence and related land as outlined in paragraph 29 of Interpretation Bulletin IT-268R3 (copy enclosed) may be applied in a similar context as it relates to your situation. Paragraph 29 of IT-268R3 states that a "residence owned by a corporation will be regarded as used in the business of farming if more than 50% of its use is as accommodation for persons who are actively employed in the farming business or their dependents".
Further to this statement, it is also our view that:
-the residence must be provided to the individual in his capacity as an employee and not as a shareholder; and
-the residence must be part of the business operation. Factors that are relevant in making such determination would include the type and size of operation and the extent of involvement of the employee in the day-to-day management of the operation. (The Department's position in paragraph 29 of IT-268R3, as outlined above assumes that the nature of farming operations is such that they must be managed virtually around the clock.)
You have not provided details to discuss the application of the above criteria as it relates to your particular situation, however, it is unlikely that a residence owned by a business located in an urban centre and that is open to customers during fixed time periods could satisfy those requirements.
As reflected in paragraph 5 of Interpretation Bulletin IT-486R (copy attached) "generally the Department considers that an asset is used in a business if its primary or principal use (i.e., more than 50% of its use) is in respect of that business". It is a question of fact in any situation as to whether land and building(s) are one asset or are separate assets.
We trust these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Enclosures
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