21 July 1994 External T.I. 9405005 - ACTIVE BUSINESS ASSET - INTERCORPORATE ADVANCES

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 trade account receivables are considered to be an asset used principally in an active business?

Position TAKEN:

Question of fact. In this instance, not an asset used principally in an active business.

Reasons FOR POSITION TAKEN:

The receivables remain outstanding for extended periods of time and are converted into intercorporate advances on a regular basis.

5-940500
XXXXXXXXXX C. Chouinard

Attention: XXXXXXXXXX

July 21, 1994

Dear Sir:

Re: Subsection 248(1) - Small Business Corporation

We are writing in reply to your letter of February 23, 1994 wherein you requested our comments regarding the definition of "small business corporation" in subsection 248(1) of the Income Tax Act (the "Act").

The situation described in your letter involves two corporations ("Corporation A and Corporation B") which are associated for income tax purposes. Corporation A leases equipment and provides administrative services to Corporation B for a fixed monthly charge. The intercompany accounts receivable account has been used to make advances to Corporation B. However, at the determination time referred to in the definition of "small business corporation" under subsection 248(1) of the Act, the advances will be fully repaid and the amount appearing under accounts receivable will represent intercompany charges for leasing and administrative services. You ask whether Corporation A's accounts receivable will be considered an asset used principally in an active business at the determination time.

Our Comments

Your request for a technical interpretation appears to relate to a situation which arose in respect of a specific taxpayer. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, a request for a written opinion on a completed transaction is generally considered by the taxpayer's local district office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following general comments.

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. The relevant facts and details will include the actual use to which the asset was put in the course of the business, the nature of the business involved and the practice in the particular industry.

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. The threshold of the test is met when the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations themselves. The test is not whether the taxpayer was forced to use the property to do business; the test is whether the property was used to fulfil a requirement which had to be met in order to do business.

The fact that an asset is a trade account receivable does not in and by itself indicate that it is an asset used principally in an active business. Trade account receivables which are held to meet current cash flow or current working capital requirements are generally considered to be used in the business. However, the Department recognizes that prudent financial management may in certain cases require businesses to maintain current assets (including cash, near cash, accounts receivables, etc.) in excess of the current cash flow or current working capital requirements and would consider this requirement in assessing whether the trade account receivables are used principally in the business. Where, however, the trade account receivables are held to offset the non-current portion of long term liabilities, they will not be considered to be used in the business.

In the situation you describe, the receivables may, at the determination time, be connected to the administrative services provided by Corporation A. However, although the receivables may have been generated by the business, the test is whether the receivables were used in the business. In our view, since the receivables generally remain outstanding for extended periods of time and appear to be converted into intercorporate advances on a regular basis, it is unlikely that they would be considered to be used in the business.

Unless as otherwise stated, all references to statute are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.

We trust that these comments will be of assistance.

Yours truly,

A.M. Brake
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch