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.
Principal Issues: When does subsection 4900(15) apply to cause the shares of a specified small business corporation to become a prohibited investment where the corporation ceases to satisfy the "active business" test in a tax year?
Position: At the beginning of the following tax year.
Reasons: To qualify as a specified small business corporation at a particular time, a corporation must satisfy the "active business" test either at that time or at the end of the corporation's preceding tax year. Consequently, where the corporation ceases to meet the "active business" test, it will retain its status as a specified small business corporation for the remainder of its tax year.
XXXXXXXXXX
2015-057967
D. Wurtele
May 28, 2015
Dear XXXXXXXXXX:
Re: Application of subsection 4900(15)
This is in reply to your email of April 6, 2015 in which you seek our views on the timing of the application of subsection 4900(15) of the Income Tax Regulations (the "Regulations").
You describe a hypothetical situation that involves shares of a corporation that are a qualified investment for a registered plan under subparagraph 4900(14)(a)(i) of the Regulations by virtue of the corporation being a specified small business corporation as defined in subsection 4901(2) of the Regulations. Midway through its 2015 tax year, the corporation undergoes a change to its asset mix such that it no longer meets the definition's "active business" test. However, because the corporation met the test at the end of its 2014 tax year, it is your view that the corporation will retain its status as a specified small business corporation for the remainder of its 2015 tax year and therefore subsection 4900(15) of the Regulations will not apply to cause the shares of the corporation to become a prohibited investment for a registered plan until the beginning of the corporation's 2016 tax year. It is also your view that the corporation could avoid the application of subsection 4900(15) of the Regulations if it takes steps to satisfy the "active business" test at the end its 2015 tax year.
Our comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act") and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
We agree with your views. To qualify as a specified small business corporation at a particular time, a corporation must satisfy the "active business" test in the definition either at that time or at the end of the corporation's preceding tax year. Consequently, where a corporation ceases to meet the "active business" test, it will retain its status as a specified small business corporation for the remainder of its tax year. Further, if it takes steps to meet the "active business" test at the end of that tax year, the corporation can maintain its status as a specified small business corporation throughout the following tax year.
We would caution, however, that if a corporation were to make repeated or deliberate use of this relief mechanism in order to avoid the application of subsection 4900(15) of the Regulations consideration would be given to the application of the general anti-avoidance rule in section 245 of the Act.
We trust our comments will be of assistance.
Yours truly,
Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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