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, where a corporation accumulates significant cash reserves in order to pay bonuses, the cash reserves constitute assets used principally in an active business for purposes of the definition of "qualified small business corporation shares" in subsection 110.6(1).
Position:
The cash reserves may constitute active business assets.
Reasons:
If a corporation has a policy of paying year-end bonuses and actually uses its cash reserves to pay the bonuses, we would generally consider the cash reserves to be an active business asset.
5-960516
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
June 13, 1996
Dear XXXXXXXXXX:
Re: Qualified Small Business Corporation Shares - Cash Reserves for Bonus
We are writing in reply to your letter of January 31, 1996, wherein you inquired whether cash reserves accumulated by a corporation for purposes of paying year-end bonuses would be considered to be assets used principally in an active business, within the meaning of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Income Tax Act (the "Act").
In the situation you describe, a recently-incorporated corporation will be engaged in the provision of engineering consulting services. Its assets will consist mainly of cash, accounts receivable, minor prepaid expenses and certain depreciable property, such as computers, office equipment and leasehold improvements. The corporation will institute a bonus system, whereby all of its earnings in excess of $200,000 per year will be paid as bonuses to certain employees. The amount of the bonuses will be determined after the end of the fiscal year when the final accounting is completed. Therefore, no bonuses will be paid during the year and the amounts will be paid within 180 days of the year end. As a result, it is expected that the corporation's cash balances will during the year exceed 50% of the fair market value of all of its assets.
As the corporation's shareholders want to ensure that their shares will at all times qualify as "qualified small business corporation shares", you inquire whether these cash balances would be considered to be assets used principally in an active business.
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. The following comments are, therefore, of a general nature only, and are not binding on the Department.
The Department's 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 makes its determination after a review of all the relevant circumstances, including 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 accumulating cash in order to pay bonuses pursuant to the corporation's policy, and the corporation actually uses the cash reserves to pay the bonuses, we would generally consider the cash reserves to be an active business asset. We caution, however, that this comment should not be taken as confirmation that the shares of the corporation described above would be qualified small business corporation shares as the qualification as active business assets of all assets, including accounts receivable, cash from all sources and prepaid expenses, would need to be determined.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1996
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1996
Email this Content