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:
1. Would a corporation with rental properties be a specified investment business?
Position:
1. Appears to be.
Reasons:
1. Reading of the relevant legislation. Consistent with Interpretation Bulletin IT- 73R6 and jurisprudence.
XXXXXXXXXX 2002-016538
Allan Nelson, C.M.A.
(613) 443-7253
November 20, 2002
Dear XXXXXXXXXX:
Re: Technical Opinion Request
We are writing in reply to your facsimile transmission to us dated September 28, 2002, wherein you have asked us whether a corporation would be carrying on a "specified investment business" as defined in subsection 125(7) of the Income Tax Act (Canada) (the "Act"). If so, you properly note that it would not be eligible to claim the small business deduction contemplated in subsection 125(1) of the Act. We also acknowledge our telephone conversation on November 18, 2002 (XXXXXXXXXX/Nelson).
You describe a private corporation ("Canco"), incorporated in Ontario (which, for the purposes of this letter is assumed to be a Canadian-controlled private corporation within the meaning of subsection 125(7) of the Act) and owned 100% by Mr. X (a resident of Ontario who is a Canadian citizen). Canco's only activity consists of renting out a small mall and XXXXXXXXXX town homes that it owns. Canco hired a property management company to manage the day-to-day operations of the mall. Canco has also hired a part-time assistant(s) to perform certain office duties. Mr. X looks after all rental contracts, on behalf of Canco, for both the mall and the town homes. For greater certainty, Canco does not employee more than 5 full-time employees, it is not associated with any other corporations, and it does not provide its tenants with a significant level of services other than those ancillary to occupying the building itself (examples of ancillary services include janitorial services to the common hallways, snow removal, etc.).
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. If your situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of some assistance to you.
Subsection 125(7) of the Act defines "specified investment business" to mean
...a business...the principal purpose of which is to derive income
(including...rents...) from property but...does not include a business...where
(a) the corporation employs in the business...more than 5 full-time employees, or (b) any other corporation associated with the corporation provides...managerial... or other similar services to the corporation...and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided;
Reference is also made to paragraphs 11 and 12 of Interpretation Bulletin IT- 73R6, "The Small Business Deduction", which state, in part, that
11. A "specified investment business" carried on by a corporation...is defined in subsection 125(7) to be a business the principal purpose...of which is to derive income from property. Such income includes...rentals from real estate...
12. "Principal purpose" is not a defined term in the Act for the purposes of the definition of "specified investment business"...but it is considered to be the main or chief objective for which the business is carried on.
From the limited information provided, Canco did not provide services to its tenants to such an extent that the rent paid by the tenants could be regarded as in a substantial measure a payment for such services as well as for the use of the property. Consequently, Canco appears to be operating a business the principal purpose of which is to derive income from property (i.e., the rental of the mall and the town homes). Assuming Canco is not a prescribed labour-sponsored venture capital corporation and given the fact that Canco has not met the exceptions in either of paragraphs (a) or (b) of the specified investment business definition, it is our opinion that Canco would be carrying on a specified investment business within the meaning of subsection 125(7) of the Act.
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 Canada Customs and Revenue Agency.
We hope the above will be of assistance to you.
Yours truly,
Milled Azzi, C.A.
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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