10 December 1991 Income Tax Severed Letter 9121335 - Venture Capital 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.

9121335
                                              P. Spice
                                              (613) 957-8953
   24(1)

Attention: 19(1) December 10, 1991

Dear 19(1)Re: Venture Capital Corporations

We are writing in reply to your letter of July 15, 1991, in which you ask whether venture capital corporations are considered to be small business investments for purposes of subsection 207.1(5) of the Income Tax Act (the "Act").

Subsection 207.1(5) imposes a tax on excessive holdings of "prescribed properties". Such properties are prescribed by subsection 4901(1.1) of the Income Tax Act Regulations (the "Regulations") to be properties described in Regulation 4900(6)(a), (b) or (c), other than a share in a public corporation and a property that is not a qualified investment for an RRSP or RRIF. Regulation 4900(6)(a) provides that a share in the capital stock of an eligible corporation (within the meaning of Regulation 5100(1)) is a qualified investment for an RRSP or RRIF, unless the annuitant under the plan or fund is a designated shareholder of the corporation. An "eligible corporation" means, among other things, a prescribed venture capital corporation described in section 6700 of the Regulations, but does not include any other venture capital corporation.

A prescribed venture capital corporation includes corporations registered under various provincial statutes relating to small business development, venture capital and equity. A complete description can be obtained by referring to Regulation 6700.

A "designated shareholder" of a corporation is any person who

(a)      is, or is related to, a person who separately or
         together with any other related persons holds 10%
         or more of the shares of any class of shares of the
         corporation, unless the cost amount of those
         shares, is in total, less than $25,000.  For this
         purpose, an annuitant of an RRSP and the RRSP
         itself are considered to be related persons,

(b)      is or is related to member of a partnership that
         controls the corporation in any manner,

(c)      is or is related to a beneficiary under a trust
         that controls the corporation in any manner,

(d)      is or is related to an employee of the corporation
         where the employees control the corporation, except
         where the corporation is controlled by one person
         or a related group of persons, or

(e) does not deal at arm's length with the corporation.

Due to the detail and complexity of the Regulations regarding these issues, the foregoing comments are meant only to provide an overview of the relevant provisions and under no circumstances are they to be considered to be either comprehensive or all inclusive. We trust, however, that they are of assistance.

Yours truly,

for Director Financial Industries Division Rulings Directorate

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