23 March 2017 CBA Commodity Taxes Roundtable, Q.1

A holding company holds debt and shares of a subsidiary with respective values of $200,000 and $100,000 and generating respective incomes of $5,000 and $1,000. Would its principal business be considered to be lending under s. 149(1)(a)(viii)?

After noting that the factors which CRA would consider in comparing two business activities in the context of a principal business determination include the relative revenues and number of supplies made, assets, and time and efforts required, CRA stated that, in this holding company example, “there are a number of factors to be considered in making this determination,” and insufficient information was provided.

Leasing companies and third-party administrators (e.g., insurance companies) might have their mix of exempt and taxable activities fluctuate annually above and below 50%. How is “principal business” determined, and is the determination made on an annual basis? CRA responded:

[I]n the context of section 149 … the CRA considers that "principal" refers to the person's chief or main business activity. …

Some factors to be considered, but not limited to, include:

• the total number of supplies made and the total value of the revenue received from supplies made in each business activity;
• the relative value of the assets employed in each business activity;
• the commercial practices of the person, including the time, attention, and efforts expended by the employees, managers, or corporate officers in each business activity; and
• the terms of any partnership agreement if the person is a partnership, or corporate objects in the case of a corporation.

[G]enerally a person does not need to determine its “principal business” on an annual basis; this determination should be made any time there is a significant change to the person’s business activities.