25 August 1992 Income Tax Severed Letter 9201915 - Assets Used Principally in Active Business

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.

5-920191
24(1) D.J. Powrie
(613) 957-2109
Attention:19(1)

August 25, 1992

Dear Sirs:

Re: Property Used Principally in an Active Business

This is in reply to your letter of December 30, 1991 in which you requested our opinion regarding whether certain balances in a company's bank account and term deposits would be considered to be "assets used principally in an active business. . ." for the purposes of the definition of qualifying small business corporation share in subsection 110.6(1).

As we discussed in our telephone conversations with 19(1) of your offices, we do not provide opinions regarding questions of fact pertaining to specific taxpayers if the taxpayer's identity has not been disclosed together with all relevant circumstances. Thus we are providing you instead with our general views as to when cash or near cash property held by a company will be considered to be used in the course of an active business.

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We stress that the following guidelines are necessarily of a general nature and that the Department will make its determination on a case by case basis through a review of the law as it applies to a particular business. The following guidelines assume that the company is carrying on an active business as defined in section 248. In our view:

• 1. The question is one of fact which must be determined based on all the relevant circumstances. The relevant circumstances will include the actual use to which the cash or near cash properties are put in the course of the business, the nature of the business involved and the practice in the particular industry.
• 2. The case law regarding whether income from cash or near cash property is "Canadian investment income" as defined in subsection 129(4) is relevant to the question of whether property is used principally in an active business for the purposes of subsection 110.6(1). Such case law considering subsection 129(4) as it read prior to the enactment of S.C. 1979, c.5 (which, among other things, added subsection 129(4.1)) turns on the question of whether the property was "used or held . . . in the course of carrying on a business". After the introduction of subsection 129(4.1), the case law also considers the broader test of whether the income from the property "is incident to or pertains to" the business. The following general guidelines reflect in part the Department's understanding of the relevant case law.
• 3. Cash or near cash property is used principally in the business if its withdrawal would destabilize the business.
• 4. Cash or near cash property is used principally in the business if its retention fulfils a requirement which had to be met in order to do business, such as certificates of deposits required to be maintained by a supplier.
• 5. The accumulation of funds in anticipation of replacement of a capital asset or the repayment of a long-term debt will not generally in itself qualify the funds as being used in the business.
• 6. Cash balances which accumulate and are then depleted in accordance with the annual seasonal fluctuations of an ongoing business will generally be considered to be used in the business but a permanent balance in excess of the company's reasonable working capital needs will generally not be considered to be so used.
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• 8. The Department recognizes that prudent financial management requires businesses to maintain current assets (including inventories and accounts receivables as well as cash and near cash properties) in excess of current liabilities and will consider this requirement in assessing whether cash or near cash assets are used principally in a business. In the Department's view, cash and near cash assets held to offset the non- current portion of long term liabilities will not generally be considered to be used in the business.
• 9. A strict reading of the Act requires that the principal use of each cash or near cash property (eg. each bank account, each term deposit, etc.) be determined. On this reading, the entire amount of a deposit well in excess of the needs of the business would be a non- qualifying asset. The Department is willing, however, to treat cash and near cash assets in the aggregate and to treat a portion of the whole as being used principally in a business.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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