5 June 1990 Ministerial Correspondence 59804 F - Small Business Corporations

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.

19(1)

June 5, 1990

Dear Sirs:

This is in reply to your letter of march 16, 1990 concerning small business corporations.

A corporation is a small business corporation as defined in subsection 248(1).  The corporation intends to sell at arm's length and in a taxable sale the land and buildings used in one of its divisions.  It will take back a mortgage form the purchaser.

You request our comments on the following:

i)     Would the mortgage be considered used in an active business carried on primarily in Canada?

ii)     If the answer to i) is no, would the answer change if the mortgage was used by the corporation to secure a line of credit and all of the funds from the line of credit are used in an active business carried on primarily in Canada?

iii)     If instead of a mortgage the operation received all cash proceeds and immediately after the sale used the after tax proceeds to pay a capital and a taxable dividend to its shareholders, would the cash that was used to pay the dividends be an asset used in an active business?

iv)     If prior to the sale of land and buildings, the corporation purchased a replacement property (within the meaning of subsection 44(5)) would the replacement property be considered to be a qualified asset prior to the sale of the original property i.e. prior to its being put into use?

Generally, the determination involved in  your requests must be based on the specific facts of the case.  Consequently, our comments are only guidelines you may wish to consider.  An advance income tax ruling might be considered for a specific proposed transaction.

Our comments on the above questions are as follows:

i)     The mortgage does not appear to be used in the business cycle. The funds tied up in the mortgage are beyond the needs of the curtailed active business and appear to be permanently set aside for investment purposes.

ii)     Even if the mortgage is used as security for funds drawn down on the line of credit the mortgage is not used in an active business.  The corporation continues to set aside the funds for investment purposes and borrow the funds needed for the active business. 

iii)     Assuming that the land and building are active business property and the resulting proceeds of sale are immediately (or within a reasonably short period of time) distributed to the shareholders as dividends, the cash temporarily on hand would be considered to be actively used in the business.

iv)     The replacement property for a property actively used in a business would by its nature be actively used in the business. Whether or not a property is, in fact, a replacement property must be determined on the basis of the specific facts.

Yours sincerely,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and intergovernmental Affairs Branch