26 February 1999 External T.I. 9901495 - QUALIFIED SMALL BUSINESS CORPORATION SHARES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether a building under construction is an active business asset for purposes of the test in the definition of “qualifying small business corporation share” in subsection 110.6(1) of the Act.

Position: Depends on the facts of the case. However, Question 18 of the 1990 Canadian Tax Foundation - Revenue Canada Roundtable contemplated a situation where a corporation purchased vacant land, obtained necessary zoning and planning clearances and in due course built head office premises on the land and then occupied the building. The question was whether the land and building would be considered to have been used in an active business from the date of acquisition of the land to the date of occupancy of the building. The Department is of the opinion that where land is acquired and a building is constructed for use in an active business that will be expanding or relocating to the new facility, and the new facility is in fact used in the active business within a reasonable period time after completion and not for any other purpose, the land and building in question will be considered to have been used in an active business from the date of acquisition of the land to the date of occupancy.

Reasons: If necessary for the financial survival of the corporation and used more than 50% in an active business.
XXXXXXXXXX 	G. Moore
		990149
February 26, 1999

Dear XXXXXXXXXX:

Re: Qualified Small Business Corporation Shares

This is in reply to your letter of January 14, 1999, in which you requested our comments regarding whether a building under construction would be considered an active business asset for purposes of the definition of “qualified small business corporation shares” in subsection 110.6(1) of the Income Tax Act (the “Act”).

You have described a situation in which the shareholders of a parent company (“Parent Co.”) sold their shares to a public company on March 25, 1998. The shareholders wish to claim the capital gains exemption, pursuant to subsection 110.6(2.1) of the Act, in respect of the capital gain realized on the disposition of the Parent Co. Shares. The capital assets of Parent Co., as shown on the balance sheet of Parent Co. as of May 31, 1997, includes a building under construction. Business was first conducted in the new building on August 8, 1997. The total cost of the building was $518,506. The shareholders’ intent in constructing the building was to rent it to its subsidiary. In its completed state, the building was used principally in an active business carried on primarily in Canada by the subsidiary. You have asked if a building under construction can be considered an active business asset, for purposes of meeting the holding tests in the definition of “qualified small business corporation share” in subsection 110.6(1) of the Act.

Our Comments

Written confirmation of the consequences inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. As it appears that the transaction in question (i.e. the sale of shares of Parent Co.) has been completed, a request for an advance income tax ruling would not be considered. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

It is a question of fact, to be determined after a review of all the relevant circumstances, whether an asset is used in an active business. The definition of “qualified small business corporation share” in subsection 110.6(1) of the Act reads, in part, as follows:

“...(c) throughout that part of the 24 months immediately preceding the determination time, while it was owned by the individual, or a person or a partnership related to the individual, was a share of the capital stock of a Canadian-controlled private corporation more than 50% of the fair market value of the assets of which was attributable to (i) assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it...

The question to be addressed is whether the building, while under construction, would be considered an asset “used principally in an active business”. The term “principally” is not a defined term in the Act. Generally, the Department considers that an asset is used principally in an active business if its primary or main use is in respect of that business. The used principally test is applied on a property by property basis.

The actual use to which the asset is put in the course of the business, the nature of the business involved and the practice in the particular industry are relevant in the determination of whether assets are used principally in an active business. The issue of whether property was used or held by a corporation in the course of carrying on a business was considered by the Supreme Court in Ensite Limited v. The Queen, 1986 C.T.C. 459. The court held that the proper test is whether the property is employed and risked in the business. A business purpose for the use of the property is not enough. The threshold of the test is met when the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations themselves. The test is not whether the taxpayer was forced to use the property to do business; the test is whether the property was used to fulfil a requirement which had to be met in order to do business.

In the case at hand, you have indicated that the shareholders’ intent in constructing the building was to rent it to its subsidiary and therefore, in its completed state, it would have been an active business asset. We cannot provide a definitive comment as to whether this particular building (whether under construction or in its completed state) is an active business asset without the opportunity to review all the relevant facts. However, Question 18 of the 1990 Canadian Tax Foundation - Revenue Canada Roundtable contemplated a situation where a corporation purchased vacant land, obtained necessary zoning and planning clearances and in due course built head office premises on the land and then occupied the building. The question was whether the land and building would be considered to have been used in an active business from the date of acquisition of the land to the date of occupancy of the building. The Department stated in its response that where land is acquired and a building is constructed for use in an active business that will be expanding or relocating to the new facility, and the new facility is in fact used in the active business within a reasonable period of time after completion and not for any other purpose, the land and building in question will be considered to have been used in an active business from the date of acquisition of the land to the date of occupancy.

We trust our comments will be of assistance to you.

Yours truly,

J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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