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 insurance proceeds received as a result of the destruction by fire of a business asset are considered an active business asset.
Position TAKEN:
Such insurance proceeds will generally be considered to be active business assets.
Reasons FOR POSITION TAKEN:
The insurance proceeds were immediately used to replace the destroyed asset which had been used in the business.
5-941675
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
October 13, 1994
Dear XXXXXXXXXX
Re: Qualified Small Business Corporation Shares - Subsection 110.6(1) of the Income Tax Act
We are writing in response to your letter of June 22, 1994, wherein you requested our comments regarding the application of the above-mentioned provision of the Income Tax Act (the "Act") in a situation involving an involuntary disposition. More specifically, you inquire whether the shares of a small business corporation, XXXXXXXXXX qualified as "qualified small business corporation shares" within the meaning of subsection 110.6(1) of the Act, from December 25, 1992 to February 18, 1994.
Our understanding of the facts is as follows:
XXXXXXXXXX
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 should be 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 comments.
Our general views as to when cash or near cash property held by a corporation will be considered to be used in the course of an active business are as follows:
1.The question of whether a particular asset is an "asset used principally in an active business" is one of fact which must be determined based on all the relevant facts and circumstances of each case. The relevant circumstances include the actual use to which the cash or near cash properties are put in the course of the business, the nature of the business and the practice in the particular business.
2.Cash or near cash property is considered to be used principally in the business if its withdrawal would destabilize the business.
3.Cash which is temporarily surplus to the needs of the business and is invested in short-term income producing investments could be considered to be used in the business.
4.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.
5.The accumulation of funds in anticipation of the replacement or purchase of capital assets or the repayment of a long-term debt will not generally in itself qualify the funds as being used in the business.
6.Cash or near cash property is considered to be used principally in the business if its retention fulfils a requirement which had to be met in order to do business, such as certificates of deposits required to be maintained by a supplier.
7.The Department recognizes that prudent financial management requires businesses to maintain current assets (including inventories and accounts receivables, as well as cash and near cash properties) in excess of current liabilities and will consider this requirement in assessing whether cash or near cash assets are used principally in a business. In the Department's view, cash and near cash assets held to offset the non-current portion of long term liabilities will not generally be considered to be used in the business.
We stress that the above guidelines are necessarily of a general nature and that the Department will make its determination after a review of all the relevant circumstances. The relevant circumstances will include the actual use to which the cash or near cash property was put in the course of the business, the nature of the business involved and the practice in the particular industry.
Where, as in the situation you describe, a corporation has significant short term cash reserves as a result of receiving insurance proceeds and the corporation immediately uses the proceeds to replace a business asset, we would generally consider the insurance proceeds to be an active business asset. We caution, however, that this comment should not be taken as confirmation that the shares of XXXXXXXXXX are qualified small business corporation shares as the qualification as active business assets of all assets, including accounts receivable, cash from all sources, investments and loans receivable, would need to be determined.
As regards the reorganization of XXXXXXXXXX share capital, if an election pursuant to subsection 85(1) of the Act is filed with respect to the disposition of the XXXXXXXXXX common shares of XXXXXXXXXX, subsections 86(1) and (2) of the Act will not apply to the disposition of these common shares by virtue of subsection 86(3) of the Act.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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