5-910120
Dear Sirs:
Re: Request for Technical Interpretation Paragraph 125(7)(e) of the Income Tax Act (the"Act")
We are writing in response to your letter, dated January 2, 1991, in which you asked for our views on the application of the above-noted provision of the Act to the following hypothetical situation.
Situation
A corporation holds real property from which it derives rental income. The corporation employs three persons on a full-time basis. These three individuals are responsible for various duties related to the rental operation (e.g. accounting, lease negotiation, and property administration).
The corporation hires an additional three persons on a full-time basis. These individuals are licensed real estate brokers who will principally sell real estate held by arm's-length parties. The real estate brokers may also sell real property held by the corporation.
You have asked whether it can be said that the corporation would employ more than five full-time employees in the business and therefore would not meet the definition of a "specified investment business" in paragraph 125(7)(e) of the Act, but would instead be an "active business" as defined in paragraph 125(7)(a) of the Act.
Specifically, you wish our clarification of the words "in the business", as used in subparagraph 125(7)(e)(i).
Our comments
In making our comments, we have assumed that the income derived by the corporation from the rental of real property constitutes income derived from the carrying on of a business.
It is our view that the phrase "in the business", as used in subparagraph 125(7)(e)(i), refers to the business that derives income from property. In the above situation, the phrase would therefore refer to the business of renting real property that is carried on by the corporation.
If the brokerage activities carried on by the corporation were part of the business that derived income from property, the corporation would not be carrying on a specified investment business because it would have in excess of five full time employees in the business that derived income from property. If, however, the brokerage activities were not part of the business that derived income from property or if these activities constituted a separate business of the corporation, the business that derived income from property would still be a specified investment business because the exception in subparagraph 125(7)(e)(i) would not be met.
Whether the brokerage activities carried on by the corporation form part of the rental business of the corporation or whether these activities constitute a separate business is a question of fact, and depends on all of the relevant circumstances including the interconnection, interlacing or interdependence of the activities being carried on in each operation. For a discussion of Revenue Canada, Taxation's position on factors to be considered in the determination of what constitutes a separate business, see Interpretation Bulletin IT-206R.
The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch