31 January 1995 External T.I. 9425695 - VENTURE CAPITAL 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.

Principal Issues:

Re: Labour-Sponsored VCC's - previous opinion stated that it is likely (although still aquestion of fact) that gains and losses are on income account - does this make the LSVCC a "trader or dealer" for ss 39(5) purposes. No capital gains for LSVCC's would appear to be inconsistent with ss 131(8) flow through rules for mutual funds.

Position TAKEN:

No - it remains a question of fact

Reasons FOR POSITION TAKEN:

	Although there is a strong possibility that	 the activities of a LSVCC qualify them as a trader or dealer, this remains a question of fact in each circumstance.

						942569
XXXXXXXXXX									J.P. Dunn

Attention: XXXXXXXXXX

January 31, 1995

Dear Sirs:

Re: Venture Capital Corporations

We are writing in response to your facsimile correspondence of October 5, 1994 regarding the ability of a venture capital corporation to make an election pursuant to subsection 39(4) of the Income Tax Act (the "Act"). We apologize for the lengthy delay in responding to your request.

As noted in our previous letter, it is the view of the Department that,

... the profits and losses attributable to a venture capital corporation's business are on income account since venture capital corporations are not passive investors but rather are carrying on the business for which they were incorporated.

It was further stated that,

whether a venture capital corporation's activities amount to carrying on a business is a question of fact,
and

it is likely that we would consider a venture capital corporation to be a "trader or dealer in securities", within the meaning of paragraph 39(5)(a) of the Act, unless the facts clearly indicated that the securities were acquired, not as part of the venture capital corporation's business, but as an adventure in the nature of trade.

You have stated that, to the extent this position is correct, a prescribed labour-sponsored venture capital corporation, within the meaning of that term in section 6701 of the Income Tax Regulations, would be considered to be carrying on a business as a trader or dealer in securities and would not, accordingly, be entitled to make an election pursuant to subsection 39(4) of the Act with the result that gains and losses on their investments would be on income account. In your view, this position is inconsistent with subsection 131(8) of the Act which deems a prescribed labour-sponsored venture capital corporation to be a mutual fund corporation thereby entitling it to the flow-through provisions of section 131 of the Act with respect to capital gains of the fund.

We would note that, although an "adventure in the nature of trade" is, pursuant to the prevailing jurisprudence, taxable on income account, the provisions of the Act do not preclude an election pursuant to subsection 39(4) of the Act to a taxpayer involved in an "adventure in the nature of trade" as long as that taxpayer is not a person described in any of paragraphs 39(5)(a) to (g) of the Act. Also, notwithstanding that a "trader or dealer in securities" is precluded from making an election pursuant to subsection 39(4) of the Act, it is our view that this prohibition does not, in and of itself, lead to the conclusion that a "trader or dealer in securities" is incapable of owning a capital property including a capital property which is a "Canadian security" within the meaning of that term in subsection 39(6) of the Act.

We do not, accordingly, share your view that the position of the Department as expressed above is necessarily inconsistent with the capital gain flow-through provisions of section 131 of the Act with respect to venture capital corporations and "prescribed labour-sponsored venture capital corporations" in particular.

Although we trust that our comments are of assistance, we caution that they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy & Legislation Branch