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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear XXXXXXXXXX
RE: Definition of Small Business Corporation ("SBC")
This is in reply to your letter of April 7, 1993 in which you requested the Department's interpretation of the definition of SBC in subsection 248(1) of the Income Tax Act. You presented a scenario in which Holdco owns Opco which is an SBC. A large portion of the fair market value of Holdco is represented by cash on deposit which is used as collateral security for a bank loan of Opco. You queried whether Holdco's cash could be considered to be "used principally in an active business carried on ... by a corporation related" to Holdco.
Our Comments:
The situation you described appears to involve specific taxpayers and specific contemplated transactions. As explained in Information Circular 70-6R2 dated September 28, 1990, assurance as to the tax consequences of proposed transactions is provided by the Rulings Directorate but only on an advance income tax rulings basis and only with respect to the taxpayers identified in such 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.
Whether any property is used in an active business is a question of fact. As a general statement, though, it is our view that 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.
In our view, cash or near cash property is used principally in a business if its withdrawal would destabilize the business or if its retention fulfils a requirement which had to be met in order to do business, such that the cash can be considered to be employed and risked in the business. As an example, certificates of deposits required to be maintained by a supplier would generally be considered to be used in a business. Where a financing arrangement that is fundamental to the business operations requires certain cash balances to be maintained and it is reasonable to conclude from the facts that the cash is employed and at risk in the business, the cash may be considered to be used in the business. In order to draw this conclusion in a factual situation, there would have to be a financial relationship of dependence of some substance between the cash and the business. However, if there is no real expectation that the cash will be resorted to, one could conclude that the cash was not used in the business. The employment of cash merely as collateral is not generally sufficient to enable it to be considered to be used in a business.
We trust that our comments are of assistance.
Yours truly,
R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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