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.
Whether a corporation whose only asset is cash would qualify as a "small business corporation".
Cannot confirm that corporation has commenced to carry on a business or that cash is used in the business.
Question of fact.
XXXXXXXXXX C. Chouinard
July 4, 1996
Re: Assets Used in an Active Business - Small Business Corporation Subsection 248(1) of the Income Tax Act
We are writing in reply to your letter of April 4, 1996, wherein you requested our comments regarding the definition of "small business corporation" in subsection 248(1) of the Income Tax Act (the "Act").
In the situation you describe, a private corporation which was incorporated in XXXXXXXXXX intends to construct XXXXXXXXXX. To that end, the corporation has raised $XXXXXXXXXX by issuing shares of its capital stock. The corporation has used a portion of the funds so raised to carry out market surveys and feasibility studies regarding XXXXXXXXXX. At present, the corporation's assets consist principally of cash (approximately $XXXXXXXXXX) raised through the initial sale of shares. The corporation intends to sell more shares in order to raise the capital necessary to construct XXXXXXXXXX. You inquire whether the corporation would presently meet the definition of "small business corporation" in subsection 248(1) of the Act, given that its only asset is cash on hand.
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.
Since it is a question of fact when a business commences operations, we cannot confirm that the business described above has commenced carrying on business. However, as indicated in Interpretation Bulletin IT-364, in order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organization structure assembled to undertake at least the essential preliminaries.
As regards the cash on hand, 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.
We trust that these comments will be of assistance.
Business and Publications Division
Income Tax Rulings and
Policy and Legislation Branch
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