1 September 1989 Ministerial Letter 58398 F - Qualified Small Business Corporation Share

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.

September 1, 1989

Dear Sirs:

Re:  Qualified Small Business Corporation Share (QSBC Share)

This is in reply to your letter of July 24, 1989, requesting our views as to circumstances under which cash and short term investments may be considered used in an active business for purposes of the definition of "small business corporation" in section 248 of the Income Tax Act (the "Act").

In particular, you are concerned about one of your clients who is in the construction industry. His company often has significant cash on hand that is invested in short-term money markets until required in the next contract for the purchase of building materials and payments for labour. One of the shareholders of the company is negotiating to sell his shares. It is important for him to know whether his shares will qualify for the enhanced capital gains exemption in subsection 110.6(1) of the Act.

In this regard it is your view that cyclical cash and short-term investments on which the interest income is treated as active business income should be considered to be "used in an active business" for purposes of the definition of "small business corporation" in the Act and thus also for purposes of determining whether or not a share is a QSBC Share.

Whether certain assets are used in an active business is a question of fact. In order to make such a determination, it is necessary to have knowledge of all the facts surrounding a particular case. As your letter contains only a general description of the circumstances, we are unable to provide a definitive opinion. We do, however, provide the following general comments.

Our Comments

It is our view that where cash that is temporarily surplus to the needs of a business is invested in short-term income-producing investments those investments may be considered to be used in the business. Where on the other hand substantial amounts of cash and deposits which are obviously in excess of that required for use in the business are retained in the corporation on a permanent basis, they would not be considered to be funds used in the business.  Rather such funds would be considered as permanently set aside for investment or non-qualified uses (i.e. uses other than in an active business). This position is stated in paragraph 8 of IT-73R4 and is consistent with similar comments in paragraph 29 of IT-268R3 and paragraph 5 of IT-486R.

Thus in our view cyclical cash and short-term investments upon which the interest income is treated as active business income may, depending on all of the circumstances, be considered to be used in an active business for purposes of the definition of "small business corporation" in the Act.

We stress that the above expression of an opinion is not a ruling and is not binding upon Revenue Canada, Taxation as explained in paragraph 24 of Information Circular 70-6R. In this respect as your letter contemplates a proposed transaction (the disposition of shares by one of the shareholders of your client corporation) you may wish to apply for an advance income tax ruling in accordance with the instructions in the above noted Information Circular.

We trust these comments are of assistance.

Yours truly,

for DirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch