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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether income from a business which rents temporary storage space would be considered "income of the corporation from an active business" within the meaning of subsection 125(7).
Position: Question of Fact
Reasons: A business the principal purpose of which is to derive income from property (including income from rentals of real property), would be considered a "specified investment business" as defined in subsection 125(7) unless, inter alia, the corporation employs in the business throughout the year more than five full-time employees. Income from a source that is property, which includes income from a specified investment (subsection 129(4)), is not to be included in the computation of "income of the corporation for the year from an active business" by virtue of its definition in 125(7).
2002-015007
XXXXXXXXXX Karen Power, CA
(613) 957-8953
August 29, 2002
Dear XXXXXXXXXX:
Re: Specified Investment Income - Temporary Storage Company
This is in reply to your letter of June 21, 2002, requesting our comments regarding whether a particular business would be considered an active business. You describe a Canadian-controlled private corporation which would be involved in the business of renting self-storage facilities. The corporation would not employ more than five full-time employees throughout the taxation year. The corporation's employees would be responsible for cleaning and maintaining the storage units. In addition, the employees would remove contents from storage units for which rent has not been paid and arrange for the sale of unclaimed goods. Certain customers may opt to pay a premium for pick-up and delivery of their items. The revenues generated from this pick-up and delivery service is anticipated to be less than 50% of the corporation's income in any given year. For purposes of this reply, we have assumed that no services are provided to the corporation by an associated corporation, and the corporation does not earn any income from an associated corporation.
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 following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency.
The meaning of active business income carried on by a corporation is discussed in detail in Interpretation Bulletin IT-73R6, "The Small Business Deduction". Paragraph 4 of IT-73R6 explains that income from an active business does not include income from a source in Canada that is property. Subsection 129(4) of the Income Tax Act (the "Act") provides that income or loss from a source in Canada that is property includes the income or loss from a "specified investment business" carried on by a corporation in Canada. Paragraph 11 of IT-73R6 explains that a "specified investment business" carried on by a corporation in a taxation year is defined in subsection 125(7) to be a business the principal purpose of which is to derive income from property (including income from rentals of real property) unless, inter alia, the corporation employs in the business throughout the year more than five full-time employees.
Whether the business is a specified investment business depends on the principal purpose of the business as a whole -- i.e. whether the principal purpose is to derive income from property. The phrase "principal purpose" is not defined in the Act and therefore must be given its ordinary meaning. As noted in paragraph 12 of IT-73R6, the "principal purpose" of a business is considered to be the main or chief objective for which the business is carried on. As stated in paragraph 14 of IT-73R6, the principal purpose of a corporation's business must be determined annually after all the facts relating to that business carried on by that corporation in that year have been considered and analyzed. Included in this evaluation should be such things as:
(a) the purpose for which the business was originally commenced;
(b) the history and evolution of its operations, including changes in its mode of operation and purpose of existence; and
(c) the manner in which the business is conducted.
In our view, a corporation , such as the one described above, involved in renting storage space would likely derive most of its income from rents. Consequently the corporation's income would be considered income from a specified investment business and excluded from the calculation of "income of the corporation from an active business," unless the corporation employed in the business throughout the year more than five full-time employees or can demonstrate that the principal purpose of its business is not the rental of storage facilities.
We trust that our comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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