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 a venture capitalist qualifies as a dealer or dealer in securities within the meaning of paragraph 39(5)(a) of the Act.
Position:
No, where the activities of the taxpayer are limited to those of a true venture capitalist as described in the attached memo.
Reasons:
XXXXXXXXXX
MEMO TO FILE
SUBJECT: Venture Capital Corporations (VCC)
Election 39(4)
ISSUE:
Is it possible that a true VCC is not always to be considered a trader or dealer in securities within the meaning of that expression as used in paragraph 39(5)(a) of the Act?
Generally a true venture capitalist invests in small and medium businesses in order to create, maintain and protect jobs, and a substantial number of the following additional factors would apply:
1.All or substantially all of the VCC's securities (other than liquid reserves) are intended to be held on a long-term basis (at least 5 years).
2. All or substantially all of the VCC's securities (other than liquid reserves) are issued by the businesses to the VCC.
3. Most of the VCC's securities (other than liquid reserves) are acquired after substantial investigation by the VCC of the issuer's business, a process that would typically take a number of weeks or months.
4. The VCC generally does not buy or sell securities (other than liquid reserves) listed on the stock exchange.
5. The VCC provides financial advice to small and medium sized businesses in connection with its stake in such businesses.
SITUATION
With respect to the subsection 39(4) election, in the Vancouver Art Metal Works Ltd. v. Canada, 93 D.T.C. 5116 case, the Court held that a taxpayer loses the right to elect under subsection 39(4) when he or she is a trader or dealer in securities, that is to say, when the taxpayer professionally engages in the business of dealing in securities or when his or her dealings amount to carrying on a business and can no longer be characterized as investor's transactions or mere adventures or concerns in the nature of trade.
In previous opinions (E942569, E941818 and E941605), the Department opined that a VCC would likely be a trader or dealer in securities and would not be entitled to make an election pursuant to subsection 39(4) of the Act, unless the facts clearly indicate that the securities were acquired, not as part of the VCC's business, but as an adventure in the nature of trade.
The Department of Finance asked us to review this position.
XXXXXXXXXX
In order to ensure that a prescribed venture capitalist can elect under subsection 39(5), the Department of Finance agreed that mutual fund corporations, including prescribed labour-sponsored venture capital corporations, should be excluded from the scope of the term "a trader or dealer in securities" in paragraoh 39(5)(a) of the Act.
Position
We accept XXXXXXXXXX that a true venture capitalist is not automatically to be considered a trader or dealer in securities as a result of its functions in and by themselves.
Section Chief
Leasing and Deferred Income Plans Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Ghislain Martineau
963480
February 7, 1997
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