Principal Issues: [TaxInterpretations translation] Does the exception in paragraph (b) of the definition of "specified investment business" in subsection 125(7) of the Act apply in a situation where a corporation is engaged in the business of leasing real property, employs four full-time employees, and pays fees to an associated corporation that provides management, administration and maintenance services to the corporation in the active conduct of its business in the following two situations:
- The associated corporation needs two full-time employees to provide services to the corporation;
- the associated corporation employs one full-time person for the maintenance of the corporation and partially employs two other employees for reception and secretarial work.
Position: In both situations, it must be determined whether it is reasonable to consider that the corporation would have needed more than five full-time employees if the services of the associated corporation had not been provided. This is a question of fact and we cannot take a definitive position without considering all the relevant facts.
The fact that the corporation employs four full-time employees and the associated corporation requires two full-time employees to perform the services for the corporation is an indication that the corporation may meet the conditions of paragraph (b) of the definition of "specified investment business" in subsection 125(7) of the Act.
In the second situation, it would have to be shown that the corporation would hire at least one full-time receptionist and secretary and one full-time maintenance person in addition to the four full-time employees who work directly for the corporation.
Raisons: The issue is one of fact. It is a question of establishing that more than five full-time employees are needed. Employees who work part-time cannot be counted as full-time employees. Two or more part-time employees cannot be considered the equivalent of a full-time employee.
XXXXXXXXXX Sylvie Labarre, CA
2004-010117
March 31, 2005
Dear Madam,
Purpose: Specified Investment Business
This is further to your fax of November 2, 2004, in which you requested our views on the definition of "specified investment business" in subsection 125(7) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your request.
XCo is involved in renting out buildings. It employs four people who work full time. YCo is associated with XCo. YCo provides management, administration and maintenance services to XCo for which it charges a fee. Two employees of YCo work full time to perform the services for XCo.
You wish to know if the exception described in paragraph (b) of the definition of "specified investment business" in subsection 125(7) can apply so that the real estate rental business will not be considered as a specified investment business.
You wish to know if our answer would be different in a situation where the services provided by YCo to XCo are performed by an employee who works full time on maintenance work for XCo, an employee who works 50% of the time as a receptionist for XCo and another employee who works 50% of the time doing secretarial work for X Co.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
Since the principal purpose of XCo's business is to earn income from property, including rent, it will be considered a specified investment business under subsection 125(7) unless one of the following two conditions is satisfied:
(a) the corporation employs in the business throughout the year more than 5 full-time employees, or
(b) any other corporation associated with the corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the corporation in the year and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided.
For the purposes of this letter, we have assumed that YCo renders the services to XCo in the active carrying on of a business.
Whether it is reasonable to consider that XCo would have needed more than five full-time employees if services had not been provided to it by YCo is a question of fact on which we cannot make a final determination without examining all the relevant facts.
However, the fact that the services rendered to XCo by YCo require the full-time employment of two employees is an indication that the exception in paragraph (b) of the definition of "specified investment business" in subsection 125(7) may apply since it may be reasonable to consider that XCo would have required six full-time employees if the services had not been rendered by YCo.
As stated in paragraph 15 of Interpretation Bulletin IT-73R6, full-time employees must work a full business day on each working day of the year, subject to normal absences due to illness or vacation. Employees working part-time cannot qualify as full-time employees. Two or more part-time employees cannot be counted as the equivalent of a full-time employee.
In the second situation you presented, we would need to determine how many full-time employees XCo would hire to replace the services provided by YCo. For example, Xco might have hired one person to do the receptionist and secretarial work for a full day's work, especially if XCo needed a receptionist for the entire day and could not use one of its four employees for reception and secretarial work. If XCo could demonstrate such a situation, as well as the need for a full-time maintenance person in addition to the other four full-time employees, we are of the view that it would be reasonable to consider that XCo would have needed six full-time employees if the services had not been rendered by YCo and that the exception provided for in paragraph (b) of the definition of "specified investment business" in subsection 125(7) could apply.
These comments are not advance income tax rulings and do not bind the Canada Revenue Agency with respect to any particular factual situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate