12 April 1994 External T.I. 9402235 - ACTIVE ASSETS

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.

Principal Issues:

Whether or not an investment in shares is an asset used principally in an active business for purposes of the definition of QSBC share?

Position TAKEN:

Question of facts but it could be.

Reasons FOR POSITION TAKEN:

5-923567, 5-923357, 5-9141, 5-9592 and 5-901071

			5-940223

XXXXXXXXXX L. Roy

Attention: XXXXXXXXXX

April 12, 1994

Dear Sirs:

Subject: Assets used principally in an active business carried on by a corporation in Canada

This is in reply to your letter of January 20, 1994 in which you requested our opinion on whether an investment in shares qualifies as an asset used principally in an active business for purposes of the definition of qualified small business corporation share set out in subsection 110.6(1) of the Income Tax Act.

All references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

The situation described in your letter appears to involve actual proposed transactions with identifiable taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990. Where the particular transactions are completed, the enquiry should be addressed to the relevant district taxation office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

Whether an investment in shares can be considered an asset used in an active business is a question of fact, and in order to make such a determination, it is necessary to review all the facts surrounding a particular situation.

Generally, the Department will consider that an asset is used by a corporation in the course of carrying on a business 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 this respect, the Supreme Court of Canada, in Ensite Limited v. The Queen, 1986 DTC 459, established that property is risked in a business when the withdrawal of the property would "have a decidedly destabilizing effect on the corporate operations themselves".

If the investment is not required to enable the company to conduct its business and if its withdrawal would not have a decidedly destabilizing effect on the company, the asset would not be considered an asset used principally in an active business.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate