7 March 1991 Income Tax Severed Letter - Definition of \"Small Business Corporation\"

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.

Dear Sirs:

Re: The Definition of "Small Business Corporation" under Subsection 248(1) of the Income Tax Act

We are writing in response to your letter of January 24, 1991 wherein you requested our view as to whether Company A would be considered a small business corporation within the meaning assigned under subsection 248(1) of the Income Tax Act (the "Act") in the following hypothetical situation outlined in your letter of January 24, 1991.

Hypothetical Situation

• 1. Each of Companies A, B, C, D and E is a "Canadian-controlled private corporation" as that term is defined in paragraph 125(7)(b) of the Act.
• 2. Each of Companies A, B, C, D and E has a 20% interest in a partnership (the "Partnership") that carries on an active business exclusively in Canada. The Partnership uses all of its assets in this active business.
• 3. Each shareholder of Companies B, C and D is related to all the shareholders of Company A. The sole shareholder of Company E is an employee of the Partnership who is not related to any of the shareholders of Companies A, B, C and D.
• 4. The only assets of Company A are its interest in the Partnership which has a fair market value of $250,000 and a real property which has a fair market value of $1,000,000 and which is leased to, and is exclusively used by, the Partnership in its active business. Consequently, in addition to its 20% share of the income of the Partnership Company A receives "rent" from the Partnership with respect to the use by the Partnership of its real property.

In connection with your request for our view as to whether, in the hypothetical situation outlined above, Company A would be a small business corporation, you specifically requested us to confirm

• (i) that in determining whether an interest in a partnership owned by a corporation is considered an asset used in an active business carried on by that corporation, it is Revenue Canada's policy to "look through" a partnership interest and to consider the partner's proportionate share of the partnership assets; and
• (ii) that the real property owned by Company A is used in its active business carried on in Canada.

Our Comments

As noted in paragraph 6 of Interpretation Bulletin IT-486R entitled "intergenerational Transfers of Shares of a Small Business Corporation", we are of the opinion that where a corporation has a partnership interest as one of its assets, it is the underlying partnership assets (to the extent of the corporation's interest therein) that are used in determining whether all or substantially all of the corporation's assets are used in an active business. Provided these assets are used in an active business carried on primarily in Canada by the partnership, they will qualify as assets used in an active business carried on primarily in Canada by the corporation for the purpose of the definition in "small business corporation".

In circumstances where real property owned by a corporation is used by a partnership of which the corporation is a member in its active business carried on primarily in Canada, it is our view that the real property owned by the corporation will qualify as an asset used in an active business carried on primarily in Canada by the corporation for the purpose of the definition of "small business corporation". In this regard it is our view that the partners of a partnership are considered to carry on the business of the partnership.

Our above comments are not rulings and are provided in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2, dated September 28, 1990.