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:
ACo and BCo are related and associated CCPCs. BCo purchases ACo's trade accounts receivable at a discount rate and under similar conditions that would be charged between arm's length parties for trade receivables with similar attributes. BCo will employ a full-time staff of fewer than six employees and no company associated with BCo will provide any services to BCo.
Is BCo a "specified investment business" as defined in subsection 125(7) of the Act?
Position TAKEN:
Question of fact. Generally no.
Reasons FOR POSITION TAKEN:
As long as the receivables are bought in the ordinary course of business of BCo, any gain on their collection would be business income, not property income.
XXXXXXXXXX 2001-006392
T. Young, CA
March 26, 2001
Dear XXXXXXXXXX:
Re: Specified Investment Business
This is in reply to your letter of January 3, 2001, requesting our views on whether income earned from factoring accounts receivable from a related and associated company is income from a "specified investment business" as defined in subsection 125(7) of the Income Tax Act (the "Act"). We also acknowledge our telephone conversations of March 7 and 13, 2001.
In your letter, you present the following facts:
- ACo and BCo are related and associated Canadian-controlled private corporations.
- ACo is a manufacturer of products that are sold to arm's length customers.
- As part of an ongoing factoring arrangement between ACo and BCo, BCo acquires ACo's trade receivables on a non-recourse basis at a discount from their face amount.
- The discount rate equals the commercial discount rate that would be charged between arm's length parties for trade receivables with similar attributes.
- BCo will remit the discounted purchase price of the accounts receivable balance immediately to ACo upon purchasing ACo's trade receivables.
- BCo will be responsible for all collection and legal activities associated with buying the receivables from ACo on a non-recourse basis. BCo will have the option of refusing to acquire specific accounts receivable to avoid assuming unnecessary risks.
- BCo will bear all expenses in administering its factoring business.
- The business will employ a full-time staff of fewer than six employees and no company associated with BCo will provide any services to BCo.
- BCo's only business is the conduct of its factoring operations with ACo. As BCo derives cash flow from the collection of trade receivables acquired from ACo, it will use these funds to buy additional trade receivables from ACo. It is not anticipated that BCo will derive any significant interest income from the temporary investment of surplus cash, if any.
You inquired if the income earned by BCo under the factoring arrangement would be income from a specified investment business.
The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R4 dated January 29, 2001, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve specific taxpayers and completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we offer the following general comments, which may be assistance to you.
A "specified investment business", as defined in subsection 125(7) of the Act, carried on by a corporation in a taxation year means a business the principal purpose of which is to derive income from property. Further, a company will not be considered a specified investment business where it has more than five full-time employees, or where it would be reasonable to expect that the company would have required more than five full-time employees had it not received managerial, administrative, financial, maintenance or similar services from an associated company in the course of its carrying on an active business.
An "active business carried on by a corporation", as defined in subsection 125(7) of the Act, means any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade.
Whether income earned by a corporation from the purchase and collection of accounts receivable is property income or business income is a question of fact. This can only be determined by examining the related agreements, details of the arrangement, level of activity, etc. However, it is our general view that income from the collection of receivables in a factoring arrangement with an arm's length person, or with non-arm's length persons at terms comparable to those between arm's length parties, carried out on a regular and ongoing basis in the ordinary course of business of a corporation resident in Canada, would generally be income from an active business. If that is the case, then the corporation is not carrying on a specified investment business.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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