24 June 1992 Income Tax Severed Letter 9208895 - Qualified Small Business Corporation Shares

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: QUALIFIED SMALL BUSINESS CORPORATION SHARES SECTION: 248(1), 110.6(2), 110.6(1)]

• 5- 920889 R. Albert (613) 957-2140

Attention: XXX

June 24, 1992

Dear Sirs:

Re: Assets Used in Active Business - Small Business Corporation Definition in Subsection 248(1) of the Income Tax Act (the "Act")

We are writing in reply to your letter of March 16, 1992 wherein you requested our comments concerning the definition of small business corporation in subsection 248(1) of the Act as it applies for purposes of the definition of qualified small business corporation shares in section 110.6 of the Act.

In particular, you are concerned whether significant amounts of cash held by a cyclical business in term deposits will be considered as assets used in an active business. During certain times of the year a cyclical business may need significant amounts of cash for operations and rather than cashing in term deposits, a company may give them as security for operating loans which fund the cyclical operations of the business.

Our comments

Whether assets are used in an active business is a question of fact and in order to make such a determination, it is necessary to have knowledge of all the facts surrounding a particular situation. We are prepared, however, to make the following general comments which may be of assistance to you.

It is our view that where cash is temporarily surplus to the needs of a business and is invested in short-term income-producing investments, those investments may be considered to be used in the business. On the other hand, where substantial amounts of cash and deposits in excess of that required for use in the business, are retained in the corporation on a permanent basis, they would not be considered as funds used in the business. Such funds would be considered to be permanently set aside for investment or uses other than in an active business. The position is consistent with comments in paragraph 8 of IT-73R4, paragraph 29 of IT-268R3 and paragraph 5 of IT-468R.

Generally cyclical cash and short-term investments upon which interest income earned 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 subsection 248(1) of the Act.

We trust that these comments will be of assistance.

Yours truly,

G. Thornley
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch