Words and Phrases - "principally"
26 July 2010 External T.I. 2010-0364721E5 F - Revenus de bien et d'entreprise
After concluding that “the operator of a bed and breakfast, who has a personal residence in which bed and breakfast rooms are rented out on a short-term basis, is generally considered to be carrying on a business” rather than having a source of property income, CRA stated:
Whether or not the rental of a building by an individual is a business, the property may be considered a "rental property" for purposes of the CCA restrictions under subsection 1100(11) … . [A] rental property is defined as a building owned by a taxpayer and used principally to gain or produce gross revenue that is rent. The term "principally" normally means 50% of the time for the purpose of gaining or producing gross revenue that is rent.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(12) | bed and breakfast operation was business rather than property source (and thus subject to s. 18(12) limitation) since more than normal essential services provided | 166 |
| Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit | reduction of personal expenses is not the pursuit of profit | 97 |
Gestions Calce Ltée v. Agence du revenu du Québec, 2019 QCCQ 7377
One of the exceptions from the rule that a rental property cannot qualify as a “former business property” for purposes of the replacement property rules in ITA ss. 13(4) and 44 references the situation of a “property … leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose.” The property in question had been rented by the taxpayer to third parties and to a related person (“CR”) for use in CR’s business of reselling used buses. The ARQ denied the Quebec replacement property rollover on the basis that the lease to CR covering only 39.6% of the floor area of the building and (if regard were to be had to qualitative factors) the rents received from CR represented less than 25% of the total rents.
Cameron JCQ nonetheless found that the “principally” test was satisfied:
- Taking into account the use of the external spaces (i.e., for parking the buses) “CR effectively used more than 50% of the collective usable external and internal square feet” (para. 35, TaxInterpretations translation)
- As the only major tenant, CR’s use of the property was qualitatively more significant (paras. 36-37)
- There was an additional unwritten lease at sufferance of the interior spaces augmenting the portion of the interior spaces leased to more than 50% (para. 38)
- CR’s rent was somewhat arbitrarily low given that the lessor (the taxpayer) received, in addition, a substantial amount as management fees” (para. 39).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Former Business Property | property was used more than 50% in active business of related lessee given actual use (in excess of written lease terms) | 337 |
S3-F3-C1 - Replacement Property
Meaning of "principally"
1.30 Where property is used in part to earn gross revenue that is rental income and in part to earn income from a business other than rental income, the principal use of the property is determined by the facts in the particular case. The word principally signifies mainly or chiefly and means more than 50%. Accordingly, one should look to the main or chief purpose or intent for which the owner uses the property. Although a pure quantum measurement may not necessarily be conclusive in every case, one of the prime factors to consider is the actual or physical proportion of the property used in the two income-earning processes. In addition, it may be necessary to consider other factors that are both relative and subjective. ...
Discounting of temporary property uses
1.31 If a property that would otherwise qualify as a former business property is rented for a short period prior to its disposition, it is a question of fact as to whether the renting was simply an interim measure while bona fide attempts were being made to sell the property. ...
1.32 Likewise, if the property remained idle for a period of time while attempts were made to sell it, the CRA would consider that the property was, immediately before the disposition, a former business property provided the property otherwise qualifies.
Voluntary disposition of Class 14.1 property generally not eligible for replacement property rules.
1.46 … One of the characteristics of a former business property is that the property is real or immovable property or an interest therein. Property included in Class 14.1 (such as a farm quota) is generally considered to be intangible property and, as such, will generally not be former business property.
Status of former business property to Amalco
1.52 Real or immovable property owned by one corporation and rented to another corporation becomes the property of the amalgamated corporation following the amalgamation of the two corporations. In this situation, if the amalgamated corporation uses the property primarily for the purpose of gaining or producing income from a business, it could qualify as former business property of the amalgamated corporation. This will be the case provided the property otherwise satisfies the requirements of the definition of former business property.
Property rented by partner to partnership business a former business property
1.54 A building owned by a taxpayer and rented to a partnership in which the taxpayer is a partner would normally qualify as a former business property if it is used by the partnership to earn business income as opposed to earning rent. While the income received from the partnership for leasing the property is classified as rent, the owner is also considered to be using the property for business purposes as a member of the partnership.
Use of rollover following s. 98(3) wind-up
1.55 Where a partnership is wound up, the partners may elect under subsection 98(3) to take an undivided interest, or for civil law an undivided right, in each property of the partnership. The undivided interests or the undivided rights may then be exchanged between the partners in order to permit a particular partner to become the sole owner of a particular property. This allows that partner to continue operating the business separately. Provided that the properties disposed of are interests in real property or rights in immovables that were used in the former partnership primarily to earn income from a business other than rent, they will qualify as former business properties.
11 February 2014 External T.I. 2014-0517611E5 F - Actions d'une société agricole familiale
In year 1 Father purchased Opco, in year 5 he transferred his shares equally to Child 1 who actively explanted the farming business of Opco along with Father (including after his death in Year 15), and to Child 2 who did not so participate. In Year 18 Child 2 transferred his or her shares to a holding company (Holdco), and in Year 20, wishes to transfer the shares of Holdco to a son. At all relevant times the assets of Opco were used in its farming business.
In finding that the shares of Holdco were shares of the capital stock of a family farm corporation, CRA stated (TaxInterpretations translation):
[T]he use of property by Father does not have to coincide with the ownership of the shares.
...Father used the property of Opco in carrying on a farming business in Canada in which he was actively engaged on a regular and continuous basis for 15 years out of a period of 21 years. We are therefore of the view that the property of Opco was used principally in the course of carrying on a farming business by an eligible person.
17 February 1992 T.I. 920014 (March 1993 Access Letter p. 86, ¶C248-127; Tax Window, No. 16, p. 18, ¶1753)
If more than 50% of an asset is used in an active business, the asset will be considered to be used principally in an active business.
12 January 1993 T.I. 923151 (November 1993 Access Letter, p. 503, ¶C109-154)
The use of the word "principally" requires that the property as a whole be considered rather than a percentage or a portion of the property. Provided that the principal or primary use test (as described in IT-195R4) is met, the entire property will not be a non-qualifying real property.