Principal Issues: How is paragraph (b) of the definition of specified investment applied
Position: Generally, it is necessary to have 6 full-time employees
Reasons: Historically, the courts have adopted a strict interpretation of Subsection 125(7) and have required 6 full-time employees in order for a corporation to be outside the definition of a specified investment business
2004-010177
XXXXXXXXXX Charles Rafuse
613-957-8967
August 12, 2005
Dear XXXXXXXXXX:
Re: Definition of Specified Investment Business
This is in reply to your letter of October 25, 2004, concerning the definition of a "specified investment business" contained in Subsection 125(7) of the Income Tax Act (the "Act").
Specifically, you have asked how paragraph (b) of the definition should be applied. Paragraph (b) indicates that a specified investment business does not include a business carried on by a corporation where 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.
Our Comments
Historically, the courts have adopted a strict interpretation of Subsection 125(7) and have required 6 full-time employees in order for a corporation to be outside the definition of a specified investment business. The CCRA has followed this court interpretation and currently requires corporations claiming this exclusion to have 6 full-time employees. Accordingly, in applying paragraph (b) we would consider whether the managerial services provided to a corporation by an associated corporation would have required 6 full-time employees.
The best indication that the test in paragraph (b) has been met is where the associated corporation has 6 or more full-time employees and it could be verified that 6 of these employees spent all their time in providing managerial services to the corporation under consideration. Another situation where the test has been met would be where full-time employees spent a portion of their time in providing managerial services and these portions added up to the equivalent of 6 full-time employees. It is possible that there may be situations where the associated corporation had fewer than 6 full-time employees and some part-time employees and the test under paragraph (b) could be met but we would expect that this would not be very frequent.
We trust this information is helpful.
Yours truly,
Charles Rafuse
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch