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.
920200
19(1) C. Tremblay
(613)952-1361
Attention: 19(1)
March 13, 1992
Dear Sirs:
Re: Capital Gains Exemption
This is in reply to your letter of January 22, 1992, requesting our opinion on whether or not the cash received by a management corporation once a year from a related operating corporation which is eventually used to pay all the salaries of the management company for the entire year is a qualifying asset for purposes of the capital gains exemption.
The situation that is described appears to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.
Our Comments
"Active business" is defined in subsection 248(1) of the Income Tax Act (the "Act") as meaning any business other than a specified investment business or a personal services bussiness. The definition of a Small Business Corporation ("SBC") in subsection 248(1) of the Act includes the words "assets that were used in an active business ...". Once having determined that a particular business is an "active business" it is then necessary to examine the assets use in that business to see if the corporation meets the test set out in the SBC definition in that "all or substantially all of the fair market value of the assets ... were (a) used in an "active business". Whether certain assets are used in an active business is also a question of fact. It is our view, however, that where an asset such as cash, temporarily surplus to the needs of a business, is invested in short-term income producing investments those investment 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 active business). These remarks are consistent with similar comments in paragraph 8 of IT-73R4, and paragraph 29 of IT-268R3 and paragraph 5 of IT-486R.
The above comments are only expressions of opinion on the application of the Income Tax Act and as such should not be construed as advance income tax rulings, nor are they binding on the Department.
Yours truly,
E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch
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