Dear Sirs:
Re: Specified Investment Business
This is in reply to your letter of June 17, 1991 requesting our comments regarding hypothetical, proposed transactions and how they may relate to the definition of qualified small business corporation share in subsection 110.6(1) of the Income Tax Act ("the Act") and to paragraph 125(7)(e) of the Act.
24(1)
The example which you set out is quite specific and it appears that it may relate to a particular contemplated transaction. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. The procedure for requesting an advance income tax ruling is outlined in Information Circular 70-6R2, published by Revenue Canada, Taxation on
September 28, 1990. If you wish to obtain any binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling application should be submitted. Although we are unable to provide any binding assurance here with respect to the queries you have raised, we do provide the following general comments for your information.
Our Comments
Whether a corporation which provides rental storage facilities, related services and a moving operation employing more than five full time employees is carrying on active business by virtue of the exemption in subparagraph 125(7)(e)(i) of the Act is a question of fact which can only be determined after an examination of all the relevant facts in the particular situation on a retrospective basis. However, to answer question number three on page two of your letter, a mini-storage business employing five or less employees that is not excluded from the definition by virtue of subparagraph 125(7)(e)(ii) of the Act would by virtue of the definition in paragraph 125(7)(e) be a specified investment business.
With respect to the definition of a specified investment business, subparagraphs 125(7)(e)(i) and (ii) of the Act set out the conditions which must be met to be excluded from that definition. Thus, as indicated above, where a corporation carries on a business in a taxation year the principal purpose of which is to derive income from property and neither of the aforementioned conditions are met, it is our view that the corporation would be considered a specified investment business. Where on the other hand a company employs more than five full time employees but carries on two separate activities, the matter to be determined is whether those activities are separate businesses or are considered one business.
The test as to whether separate businesses exist is found in Scales v George Thompson & Company Limited (1927). 13 TC 83. The court found it to be a question of fact whether or not different operations constitute one business or two separate businesses. At page 89 it is stated that the real question is whether or not there are any interconnection, any interlacing, any inter-dependence, any unity at all embracing those two businesses.
Factors that are relevant in making such a determination are provided in paragraph 3 of Interpretation Bulletin IT-206R and include:
(a) the extent to which the two operations have common factors that may be pertinent,
(b) whether the operations are carried on in the same premises, 000146
(c) whether one operation exists primarily to supply the other,
(d) whether the taxpayer's accounting system records the transactions of both operations as if they were those of one business, or whether a separate, complete set of records are maintained throughout the year.
In your particular example, based on the hypothetical facts given, the mini-storage facilities and moving operations of the company could very well be one business. If this is in fact the case, the specified investment business rules would not apply pursuant to the exemption in subparagraph 125(7)(e)(i) of the Act. Providing all the conditions set out in the definition in subsection 110.6(1) of "qualified small business corporation share" are met it is likely, upon disposition, that such shares would qualify for the enhanced deduction in subsection 110.6(2.1) of the Act.
As indicated, the above comments are only an expression of opinion on the application of the Income Tax Act to your hypothetical example and as such should not be construed as an advance income tax ruling, nor are they binding on the Department.
We trust our comments are of assistance.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch