Principal Issues: [TaxInterpretations translation] 1. Is vacant land acquired for resale an asset used principally in an active business carried on primarily in Canada by a corporation?
2. Are assets used by a corporation to earn active business income for purposes of subsection 125(1) assets whose fair market value is attributable to an active business carried on by the corporation in Canada for purposes of subsection 110.6(1)?
Position: 1. The assets must be used in an active business carried on by the corporation as defined in subsection 248(1). This is essentially a question of fact. Although an adventure or concern in the nature of trade is a business, it does not necessarily follow that a taxpayer who has engaged in such an adventure is carrying on a business. It is necessary to determine the type and frequency of activities (e.g., activities that are minimal and done solely to facilitate sales vs. activities that go beyond minimal and passive, being indicative of a commercial enterprise)
2. Not necessarily. The definition of active business for the purposes of subsection 125(1) is different from the definition used for the purposes of subsection 110.6(1) with respect to an adventure or concern in the nature of trade. Such an adventure, which would not be an active business within the ordinary meaning of that term, could be an active business for the purposes of subsection 125(1) but not for the purposes of subsection 110.6(1).
Reasons: 1. To meet the definition of active business in subsection 248(1), the business must be carried on.
1991 APFF Conference Roundtable
Paragraph 3 of Interpretation Bulletin IT-459
2. Active business is defined in subsection 125(7) (which applies to section 125 only) to include an adventure or concern in the nature of trade whereas the definition of the same term in subsection 248(1) does not include such an adventure or concern.
XXXXXXXXXX Sylvie Labarre, CA
2004-006203
July 20, 2004
Dear Sir,
Subject: Assets used in an active business
This is further to your letter of February 6, 2004, in which you requested our opinion regarding the characterization of vacant land as an asset used principally in an active business carried on by a corporation primarily in Canada for the purposes of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your request.
You provided the example of two corporations owning vacant land and would like to know whether such vacant land would so qualify.
The first corporation owned a large area of vacant land in Canada (for instance, in an industrial park) and, as the corporation wished to locate in the park, it subdivided and sold portions of the vacant lot. The corporation's only activity was to hold the land in Canada for resale in parcels, after subdivision.
The second corporation held vacant land in Canada and, in order to resell it, it must do filling, logging, soil remediation, waterworks, roads and lot subdivisions.
In addition, you wish to know whether assets used by a corporation to earn income from an active business carried on in Canada for the purposes of subsection 125(1) can be considered to be assets the fair market value of which is attributable to an active business carried on by the corporation in Canada for the purposes of the definition of "small business corporation" used in the definition of "eligible small business corporation share" in subsection 110.6(1).
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.
You referred to the position we took in 1991 at the Federal Tax Roundtable at the APFF Conference in which we stated that, in general, a corporation whose business is the purchase and sale of vacant land will qualify as a small business corporation provided the vacant land is used in an active business carried on by the corporation.
We also indicated that it is essentially a question of fact whether a person is carrying on a business and that under Tara Exploration and Development Company Limited v. MNR, 70 D.T.C. 6370 and Ward v. The Queen, 88 D.T.C. 6212, which deal with the distinction between carrying on a business and an adventure or concern in the nature of trade, carrying on a business refers to the carrying on of activities for the purpose of profit.
Furthermore, paragraph 3 of Interpretation Bulletin IT-459 states the following:
Although an adventure or concern in the nature of trade is included in the definition of the term "business" in section 248, it does not necessarily mean that a taxpayer who is engaged in an adventure or concern in the nature of trade is "carrying on" a business or has "carried on" a business. Where these phrases are used in the Act, a determination is made based on the degree of activity and each situation must be considered in the light of its own particular facts.
Based on our understanding of the facts in these situations, we consider that the vacant land was acquired for the purpose of resale and is not a capital property. Furthermore, we understand that the corporations do not carry out any activities other than those stated in the facts. The question is therefore whether the level of activities carried on by each of the corporations is sufficient for the corporation to be considered to be carrying on a business.
We are of the view that a corporation would not be carrying on a business where the purchase and sale of land are isolated or infrequent events, are not related to the other activities of a business carried on by the corporation, and where the activities are minimal or required solely to facilitate the sale. Subject to a review of all the facts relevant to the first situation presented, this may be the case for the first corporation. If that were the case, the vacant land held by that corporation would not be assets used principally in an active business carried on primarily in Canada by the corporation for the purposes of the definition of "qualified small business corporation share" in subsection 110.6(1).
On the other hand, it is our view that a corporation would be carrying on a business if it engaged in more extensive activities, beyond the passive or limited activities required to facilitate the sale or beyond the installation of services required by law for subdivision approval, or if it gave evidence of a commercial enterprise such as advertising and marketing activities or considerable time, attention and resources being devoted to the sale of the property. In the second situation presented, it would be necessary to examine all the relevant facts to determine whether the activities of filling, logging, soil remediation, water works, roads and lot subdivisions were sufficient for the second corporation to be considered to be carrying on a business.
If, as a result of this review, it was determined that the second corporation is carrying on a business, it would be necessary to ensure, as with any other business, that its assets were used in the business. The Supreme Court of Canada established in Ensite Limited v. The Queen (86 DTC 6521) that the asset must be used or risked in the business to be considered used in a business. If the second corporation carried on a business primarily in Canada, it is our view that the vacant land acquired and held for resale in the course of carrying on that business would be assets used principally in an active business carried on by a corporation primarily in Canada for purposes of the definition of "qualified small business corporation share" in subsection 110.6(1).
On the other hand, we are of the view that assets used by a corporation to earn income from an active business carried on in Canada for the purposes of subsection 125(1) are not necessarily assets the fair market value of which is attributable to an active business carried on by the corporation in Canada for the purposes of the definition "small business corporation" used in the definition "qualified small business corporation share" in subsection 110.6(1). Subsection 125(7) contains a definition of "active business carried on by a corporation" for the purposes of section 125 which is different from the definition used for the purposes of subsection 110.6(1) (i.e., the definition found in subsection 248(1)). Under the definition in subsection 125(7), the term "active business carried on by a corporation" includes an adventure or concern in the nature of trade, which is different from the definition of the same term in subsection 248(1). Thus, an adventure or concern in the nature of trade that would not be a business "carried on” within the ordinary meaning of that term could be an active business for the purposes of subsection 125(1) but not for the purposes of subsection 110.6(1).
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch