11 January 1990 Income Tax Severed Letter AC32599 - Capital Gains Exemption - Qualified Small Business Corporation Share

19(1)                                   3-2599
                                             R.B.Day
                                             (613) 957-2136

JAN 11 1990

19(1)

Re: 24(1)

We are writing with respect to your letter of October 30, 1989, wherein you advised that the advance income tax ruling request regarding this taxpayer dated July 14, 1989, has been withdrawn. In its place, you have requested our interpretation of the phrase "used in an active business" as it relates to the meaning of "qualified small business corporation share" ("QSBCS") as defined in subsection 110.6(1) of the Income Tax Act for purposes of the enhanced capital gains exemption in subsection 110.6(2.1).

Our understanding of the scenario set out in your letter is as follows:

A corporation carries on active business in Canada which involves the operation of a trailer park and marina. The corporate assets consist of land and buildings including a residence, for the use of the shareholder/manager, out buildings and trailer sites.

The basement portion of the residence is used to store inventory. The main floor of the residence, although set-up as living quarters is subject to business related activities because of the 24 hour nature of the business. Since the type of business requires an on site attendant on a 24 hour basis to safeguard boats, trailers etc., it is your view that the residence is required for and used in that business.

Our Comments

Paragraph 5 of IT-486R sets out the Department's views regarding business asset use as follows:

"Generally the Department considers that as asset is used in a business if its primary or principal use (i.e. more than 50% of its use) is in respect of that business."

Where a personal use property, such as a principal residence, is concerned it is our view that its primary use would be that of providing a residence for the shareholder/manager rather than for use in the business.

In view of the above, it is our opinion that the residence, in the above scenario, would not be an asset "used in an active business" for purposes of the QSBCS definition in subsection 110.6(1).

The $335 deposit, which accompanied your original ruling request will be returned under separate cover.

Yours truly,

for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch