Active Business Vs.Investment Business

Volume No. 06-16

“Past History and intention is relevant in determining if company carries on an active business.”

There is often an issue as to whether a corporation is carrying on an active business or a specified investment business. This is relevant in determining whether an individual can claim an allowable business investment loss (“ABIL”) on loans to that corporation.Mr. Alain Belzile (2004 TCC 137) had claimed an ABIL on his loan to a corporation. The taxpayer had incorporated corporations previously to build properties for sale. At all times, those corporations reported their income as active business income.

The taxpayer incorporated a new corporation to build an eight-apartment building for resale.Unfortunately, due to poor economic conditions, the corporation was unable to sell the property for a reasonable price. Instead, it was rented until it could be sold. Eventually, the corporation sold the property for about half of its original cost. The taxpayer claimed that thecorporation was not carrying on a specified investment business, as it was always intended to build an apartment building and sell to it. The CRA claimed that intention was not relevant.The corporation was earning rental income and did not have five employees. It was therefore carrying on a specified investment business.

The Tax Court decided that the corporation was carrying on an active business because:

  1. This was not the first time that the taxpayer had set up corporations to build property for resale;
  2. It was clear from the Articles of the corporation that its economic activity was construction;
  3. A financial statement of the corporation reported the real estate as inventory intended for resale;
  4. The rental income earned, and the advances made by the taxpayer, merely served to keep everything in order until the sale of the building, which special circumstances made difficult.

This case is interesting because the Income Tax Act does not mention intention indetermining whether the corporation is a specified investment business or carries on an active business. This case provides further evidence that the past history and intention of the taxpayer is particularly relevant in determining whether a corporation is carrying on an active business.


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