5 April 1993 Income Tax Severed Letter 9301675 - Assets Used in Active Business—Small Business Corporation

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.

                                        930167
XXXXXXXXXX                              J.D. Brooks
                                        (613) 957-2103

Attention: XXXXXXXXXX April 5, 1993 Dear Sirs:

Re: Small Business Corporations

This is in reply to your letter of January 15, 1993 in which you requested our view as to whether a corporate taxpayer would be viewed as a small business corporation within the meaning of subsection 248(1) of the Income Tax Act (the "Act").

The taxpayer is a Canadian-controlled private corporation within the meaning of paragraph 125(7)(b) of the Act. The taxpayer operates a store in Ontario under a franchise agreement. You stated that, under the terms of the franchise, the taxpayer is required to purchase a minimum amount of shares in another corporation which is the franchiser. The franchiser is also the wholesaler to the taxpayer. The stated purpose of the share ownership in the other corporation is to provide a form of security in respect of trade payables owing to it by the taxpayer.

Your concern is whether, for purposes of determining if the taxpayer is a small business corporation, the shares of the other corporation owned by the taxpayer could be considered to be assets "used principally in an active business carried on in Canada" by the taxpayer.

Our Comments

Your enquiry obviously concerns a specific taxpayer and may involve contemplated transactions. The Department does not provide binding opinions on proposed transactions other than by way of advance income tax rulings. Although we are unable to provide any opinion in respect of the specific case you have described, we have set out below some comments of a general nature.

It is the Department's view that it is a question of fact, to be determined after a review of all the relevant circumstances, whether certain assets are used in an active business. Generally speaking, the Department will consider that an asset is used in a business carried on by it if it is principally used in that business and at risk with respect to that business. This implies that the risk must be more than a remote risk and that the use of the asset must go beyond simply using it for business purposes.

In our view, where a taxpayer operates a business under a franchise arrangement and shares are acquired under the terms of the franchise agreement or are acquired to fulfill a contractual business obligation which is necessary for obtaining and maintaining the franchise, it is reasonable that such shares would be considered to be 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.

We trust that our comments are of assistance.

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