2 December 1992 Income Tax Severed Letter 9226045 - Assets Used in Active Business - Cash

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.

922604
XXXXXXXXXX J.D. Brooks
(613) 957-2103

Attention: XXXXXXXXXX

December 2, 1992

Dear Sirs:

Re: Assets Used in an Active Business

This is in reply to your letter of August 26, 1992 in which you requested our opinion as to whether certain levies which a corporation must pay would be considered to be assets used in an active business for purposes of the definition of qualified small business corporation share in subsection 110.6(1) of the Income Tax Act. You stated that under the Ontario Pits and Quarries Regulations, a person operating a sand and gravel pit must pay levies to the Province of Ontario. These levies are refundable in whole or part upon the person fulfilling his obligations under the Pits and Quarries Control Act to rehabilitate the pit site area.

Our Comments

As you pointed out, the issue of the deductibility of such levies was addressed in the case of The Queen v. Nomad Sand and Gravel Limited [[1991] 1 C.T.C. 60] (91 DTC 5032, FCA). It was determined that such levies are paid to the province as security for future land rehabilitation work which the pit operator is obligated to perform. The security is held by the Treasurer of the Province and earns interest which is payable to the pit operator upon his fulfillment of the requisite rehabilitation. Until such time as the security may be forfeited, the security is in the nature of a deposit of the pit operator.

Generally, 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, such funds would not be considered to be used in the business. In considering the facts surrounding the security deposits in question, it is noted that the payments placed on deposit are required pursuant to the Pits and Quarries Control Act in order for the pit operator to maintain his licence issued under that Act and thereby conduct his business. Furthermore, since such security deposits cannot be received by him until he performs certain land rehabilitation work, such deposits could not, in our view, be considered to be in excess of what was required for use in the business, until such time as the deposits become refundable. It is our view that these deposits would generally be viewed as being used in an active business.

These comments represent an expression of opinion and, as stated in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.

Yours truly,
E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch