ARCHIVED - Rental Property - Meaning of "Principal Business"
DATE: April 25, 1977
SUBJECT: INCOME TAX ACT
Rental Property - Meaning of "Principal Business"
REFERENCE: Regulation 1100(12) (Also paragraph 20(1)(a))
1. Interpretation Bulletin IT-195R2, "Rental Property - Capital Cost Allowance Restrictions", describes the effect of Regulation 1100(11) upon the amount of capital cost allowance claimed by a taxpayer on "rental property" as defined by Regulation 1100(14). This bulletin is concerned with the provisions of Regulation 1100(12) which excepts certain corporations and partnerships from those restrictions.
2. Regulation 1100(12) provides that the capital cost allowance restriction prescribed by Regulation 1100(11) does not apply to a taxpayer that was throughout the year a life insurance corporation, a corporation whose principal business was the leasing, rental development or sale, or any combination thereof, of real property owned by it, or a partnership each member of which was a corporation described above. This provision applies as well to non-residents as to residents.
3. A partnership qualifies within Regulation 1100(12) only if each of its members is a corporation described therein. That is, each corporate member must have been throughout the year, a life insurance corporation or a corporation whose principal business was the leasing, rental, development or sale, or any combination thereof, of real property owned by it, if the partnership is to qualify.
4. A partnership having a partnership as a member at any time in the year cannot qualify under Regulation 1100(12) even thought that member qualified because all of its members were, throughout the year, qualified corporations.
5. Whether or not a business is a "principal" business is a matter of significance only where the taxpayer carried on more than one business in the taxation year. The phrase "principal business" is not defined by the Act or the Regulations and accordingly the words must be given their usual meaning and the identity of a taxpayer's principal business determined from the facts of the particular case.
6. Regulation 1100(12) requires that the business be the taxpayer's principal business "throughout the year". In this respect it is similar to subsection 18(8) of the Act but it is unlike other references to "principal business" in the Act (for example, subsection 66(2) and subparagraph 133(8)(d)(iv)) which only require the particular business to have been a principal business in the taxation year. Nevertheless it is the Department's view that the criteria for identifying a principal business for the purposes of Regulation 1100(12) are not different from those set out in Interpretation Bulletin IT-290, "Non-Resident-Owned Investment Corporation - Meaning of Principal Business."
7. There is no standard set of criteria that may be looked to where the nature of each of a taxpayer's businesses is known but it must be determined which of them is his principal business; the significant factors of each case must be searched out and evaluated. In the Department's view the following are among the factors which may be relevant;
(a) the profits realized by each of the businesses;
(b) the volume and the value of the gross sales or transactions of each business;
(c) the value of the assets of each business;
(d) the capital employed in each business; and
(e) the time, attention and effort expended by the employees, agents or officers in each business.
8. Although the determination of which of a taxpayer's businesses is the principal business is made in respect of a particular taxation year, it is often necessary to consider patterns over several years. Thus, if a particular business has been the principal business and in a particular year (evaluated in isolation from preceding and succeeding years) it fails to satisfy many of the tests, it does not necessarily follow that another business has become the principal business in that year. For example it may be that, because of economic conditions and not because of a change in management's policies, there has been in a particular year a reduction in the level of activities of the business which was the principal business, so that another business appears to have assumed that role. If this condition continues only in the short run and thereafter the business again satisfies the tests of being the principal business, the Department's view is that the principal business may not have changed during that period. Whether this is so in any particular case can only be determined by a review of the circumstances of that case.
9. Interpretation Bulletin IT-72R2, "Meaning of "Active Business"' indicates the Department's view that a corporation which derives income from rentals is in the rental business and thus satisfies one of the criteria of Regulation 1100(12). If it has no other business or if it has other businesses but the rental business is its principal business, then the requirements of the Regulation are met, although the business may not satisfy the tests of being an active business.
10. In the Department's view a person who operates a hotel is in the business of providing services and not in the rental business. Thus a corporation in that business does not qualify under Regulation 1100(12) no matter that it is its principal business.
11. "Real property" in the context of Regulation 1100(12) includes a reference to buildings which are depreciable property of the taxpayer whether situated on land owned by him or in which he has a leasehold interest.
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