7 July 1993 External T.I. 9306075 F - Service Business Motels

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Advance Tax Rulings Request and the Raymond Malenfant v. M.N.R. 92 DTC 2081 Decision

This is in reply to your letter of February 28, 1993, wherein you requested our comments as to whether we would issue favourable advance tax rulings and/or an opinion on matters related to the decision rendered in the above-noted case.

The procedure for requesting an advance income tax ruling is outlined in Information Circular 70-6R2, published by Revenue Canada, Taxation on September 28, 1990. Special Release 70-6R2 dated September 30, 1992 is also applicable. If you wish binding commitment with respect to your client's proposed transaction, you may request an advance tax ruling following the procedures outlined in the aforementioned publications.

It would seem that your concern stems from paragraph 14(b) of the aforementioned publication relating to decisions before the court. The Department does not accept the decision in the Malenfant case as setting a precedent and has appealed the decision to the Federal Court. While every request for an advance ruling would have to be considered on an individual basis, we may consider it necessary to refuse to rule until such time as the matter before the courts has been finalized.

Pursuant to paragraph 125(7)(e) of the Act where income is earned by a corporation through the carrying on of a business, "the principal purpose of which is to derive income from property", that business will be a specified investment business unless one of the subparagraph 127(7)(e)(i) or (ii) conditions is satisfied. The phrase "principle purpose" is not defined in the Act and therefore must be given its usual meaning with the result that this determination can only be made on the basis of all the relevant facts of a particular situation. As noted in paragraph 2 of Interpretation Bulletin IT-290 the word "principal" is considered synonymous with the words chief and main, however, for the purpose of paragraph 125(7)(e), it is the principal purpose of the business which must be considered rather than the principal business as discussed in the above-mentioned Interpretation Bulletin. In our opinion, since it is a purpose test which is involved in this provision, all the relevant factors concerning the income earning process of a particular situation would have to be considered to determine whether or not the income derived constituted income from property, i.e., the source of the revenue would not necessarily be the only relevant factor in determining whether or not the revenue would constitute income from property.

In determining whether the principal purpose of a particular operation, such as a motel, is to derive income from property, the number and kinds of services it provides is the dominant factor. It is our opinion that 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."

These comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 and are not binding on Revenue Canada, Taxation.

We trust that you will find our comments helpful.

Yours truly,

R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch