Principal Issues: In a given situation, does CRA consider that the principal business of a corporation is leasing, rental, development, sale or any combination of these activities of immovable property which it owned within the meaning of subsection 1100(12) I.T.R.?
Position: None. General comments provided.
Reasons: It is a question of facts. CRA's longstanding position is provided in IT-371.
FEDERAL TAX ROUNDTABLE, NOVEMBER 2, 2023
APFF CONFERENCE 2023
5. Application 1100(12) of the Income Tax Regulations
Aco carries on the business of renting real estate owned by it.
Aco also holds shares in various operating companies from which it regularly receives dividend income.
Aco also receives interest income on loans granted to related companies.
The holding of shares in operating companies and the granting of loans ("Passive Activities") constitute passive investments and require very little time and effort on the part of the directors of Aco.
Question to the CRA
For the purposes of subsection 1100(12) of the Income Tax Regulations (footnote 1), does the CRA consider Aco's principal business to be the “leasing, rental, development, or sale, or any combination thereof” of real property owned by it if the income from and the capital invested in the two Passive Activities represent more than 50% of Aco's total income and invested capital?
CRA Response
Subsection 1100(11) I.T.R. restricts the capital cost allowance that a taxpayer may deduct in computing income for a taxation year in respect of property of a prescribed class that includes rental property owned by the taxpayer.
Subsection 1100(12) I.T.R. provides, however, that this restriction does not apply in respect of a taxation year of a taxpayer that was, throughout the year, inter alia, a corporation whose principal business was the leasing, rental, development or sale, or any combination thereof, of real property owned by it.
The Income Tax Act and the Income Tax Regulations do not define "principal business". The CRA's longstanding position on this issue is set out in Interpretation Bulletin IT-371 (footnote 2).
As stated in paragraph 5 of Interpretation Bulletin IT-371, the determination of a taxpayer's principal business for the purposes of subsection 1100(12) I.T.R. is a matter of significance only where the taxpayer carried on more than one business in the taxation year.
In fact, as stated in paragraph 9 of Interpretation Bulletin IT-371, a corporation which derives income from rentals and whose only business is a rental business satisfies the requirements of subsection 1100(12) I.T.R. Where the corporation carries on other businesses, but the rental business is its principal business, it will also satisfy the requirements of subsection 1100(12) I.T.R.
Whether a taxpayer carries on one or more businesses during a taxation year is, however, a question of fact. Since the statement of the question only briefly describes a given hypothetical situation, the CRA cannot definitively pronounce on the question of whether the taxpayer carries on one or more businesses during a taxation year.
As indicated in paragraph 2 of Interpretation Bulletin IT-206R, (footnote 3) the question of whether the carrying on of two or more simultaneous business operations by a taxpayer is the same business is dependent upon, among other things, the degree of interconnection, interlacing or interdependence existing between the business operations. The factors to be considered in making this determination are set out in paragraph 3 of Interpretation Bulletin IT-206R.
Finally, the question of what is the principal business of a taxpayer that is a corporation within the meaning of subsection 1100(12) I.T.R. is a question of fact and each situation can only be resolved after an examination of all the relevant facts.
As stated in paragraph 7 of Interpretation Bulletin IT-371, there are no established criteria. The CRA is of the view that the following factors are among those that may be relevant:
(1) the profits realized by each of the businesses;
(2) the volume and the value of the gross sales or transactions of each business;
(3) the value of the assets of each business;
(4) the capital employed in each business; and
(5) the time, attention and effort expended by the employees, agents or officers in each business.
While the revenue or profit criteria may be important, they will not necessarily be determinative. Since the statement of the question only briefly describes a hypothetical situation, the CRA cannot make a definitive statement as to what is the taxpayer's principal business.
Rachel Jacques-Mignault
November 2, 2023
2023-098282
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 C.R.C., c. 945 ("R.I.R.").
2 CANADA REVENUE AGENCY, Interpretation Bulletin IT-371 (archived), "Rental Property - Meaning of ‘Principal Business’", April 25, 1977.
3 CANADA REVENUE AGENCY, Interpretation Bulletin IT-206R (archived), "Separate Businesses", October 29, 1979.