14 February 2006 External T.I. 2005-0150361E5 - 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.

Principal Issues: Whether a corporation operating work-camp would qualify as a "small business corporation"

Position: Question of fact.

Reasons: Corporation is not a personal services business and not likely a specified investment business within the meaning of subsection 125(7).

							2005-015036
XXXXXXXXXX 						Rob Ferrari
(613) 957-2138
February 14, 2006

Dear XXXXXXXXXX:

Re: Small Business Corporation

We are writing in response to your letter of August 22, 2005, wherein you requested our comments on whether a corporation is considered to have active business income for the purposes of the capital gains deduction.

You have indicated the corporation leases land from the province and operates a work camp for XXXXXXXXXX. The camp provides furnished lodging, fresh linens, housekeeping, meals, laundromat, office space (trailers) and fuel for resale. The issue is whether the corporation's operations represent an "active business" as that expression is used in the definitions of "small business corporation share" in subsection 110.6(1) and "small business corporation" in subsection 248(1) of the Income Tax Act (the "Act").

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are therefore, of a general nature only, and are not binding on the Agency.

In order to qualify as a "small business corporation" within the meaning of subsection 248(1) of the Act, all or substantially all of the fair market value of the assets of a corporation must, at that time, be used principally in an active business carried on primarily in Canada. "Active business" is defined in subsection 248(1) of the Act as any business carried on by a taxpayer resident in Canada, other than a "specified investment business" or a "personal services business". These latter two terms are defined in subsection 248(1) of the Act and derive their meanings from definitions in subsection 125(7) of the Act. A "specified investment business" carried on by a corporation means a business whose principal purpose is to derive income from property, such as rental property, unless the corporation employs in the business throughout the year more than five full-time employees.

You indicate that during the corporation's active period of the year, the corporation may have employed less than 6 full-time employees and during its inactive period only two shareholders tend the camp for security purposes. Accordingly, the corporation did not employ in the business throughout the year more than five full-time employees as provided by subsection 125(7) of the Act.

However, the corporation may still be excluded from the definition of a specified investment business if its principal purpose was not to derive income from property. In determining whether a business operation is an active business, the number and kind of services it provides is the dominant factor. Interpretation Bulletin IT-73R6 indicates in paragraph 13 that a corporation which operates a hotel is generally considered to be in the business of providing services and not in the business of renting property. Since it is a question of fact whether a particular corporation is a "small business corporation", we cannot comment specifically on your query. However, the operation of a work-camp where services include meals, furnished lodging, fresh linens, housekeeping, laundromat and fuel sales would likely be providing a sufficient level of services such that it would not be considered to constitute a business the "principal purpose of which is to derive income from property".

Finally, the definition of "small business corporation" in subsection 248(1) reads, in part, "... all or substantially all of the fair market value of the assets of which at that time was attributable to assets that are...used principally in an active business...". In our view, the expression "all or substantially all" means that at least 90% of the fair market value of the assets must be attributable to assets used in the active business. Whether a particular asset is used principally in an active business is a question of fact, which must be determined with reference to the circumstances of the case under review. The relevant circumstances include the actual use to which the asset is put in the course of the business, the nature of the business and the practice in the particular business. In the present situation, the information submitted does not allow us to determine whether these requirements have been met.

We trust that these comments will be of assistance.

Yours truly

Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch