30 September 1997 External T.I. 9724075 - QUALIFYING ACTIVE BUSINESS START UP PERIOD

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:

Are shares of a corporation qualified investments for an RRSP where the corporation's primary activity is the accumulation of funds for future investment in qualified active businesses?

Position TAKEN:

Question of fact. The corporation would have to be considered to be carrying on an active business at the relevant time(s). However, in our opinion it might be quite difficult to substantiate the corporation qualifies in such circumstances.

Reasons FOR POSITION TAKEN:

Where the only undertaking of a corporation is the accumulation of capital it is more likely the corporation has a specified investment business and not an active business.

972407
XXXXXXXXXX W.C. Harding

Attention: XXXXXXXXXX

September 30, 1997

Dear Sirs:

Re: Income Tax Regulations 4900(6) and 4900(12)

This is in reply to your letter of August 19, 1997, wherein you requested our comments on whether shares of a corporation would be qualified investments for an RRSP in accordance with either subsection 4900(6) or (12) of the Income Tax Regulations (the "Regulations") where the corporation's primary activity is the accumulation of funds for future investment in qualified active businesses.

Shares of a corporation may qualify under subsection 4900(6) of the regulations, if the corporation, inter alia, uses all or substantially all of its assets in a "qualifying active business" as defined in subsection 5100(1) of the Regulations. Shares of a corporation may also qualify under subsection 4900(12) of the Regulations if the corporation, inter alia, uses all or substantially all of its assets principally in an "active business" carried on primarily in Canada. In either case, the use of the corporation's property must be determined at a particular time. In the case of Regulation 4900(6), this is the time the shares are acquired by the RRSP and at any time thereafter. In the case of Regulation 4900(12) it is the time the shares are acquired or at the end of the last taxation year ending before that time.

In our opinion the intent of these provisions is to treat shares of a corporation as qualified investments where the above provisions are satisfied at the particular time. We therefore can not concur with your view that (where a corporation is not already using the funds in an active business) as long as the principal purpose for holding the invested funds is to fund future qualifying business activities the conditions will be satisfied.

The term "active business" is defined in subsection 248(1) of the Income Tax Act (the "Act") as any business carried on by a taxpayer resident in Canada, other than a "specified investment business" or a "personal services business". These latter two terms are defined in subsection 248(1) of the Act and derive their meanings from definitions in subsection 125(7) of the Act. A "specified investment business" carried on by a corporation means a business whose principal purpose is to derive income from property, such as rental property, unless the corporation employs in the business throughout the year more than five full-time employees. For the purposes of this reply, a "qualifying active business" is similar to an active business.

In the situation where a corporation is raising capital to be used for future expansion and temporarily invests the capital in term deposits or other similar investments such that the investments represent most of the fair market value of the corporations assets, the issue is whether the corporation is operating a "specified investment business" at the particular time or has commenced to operate an active business in which the capital is used.

The determination of when a business commences is a question of fact that can only be determined after reviewing all the relevant facts and information. The Department's general comments regarding commencement of business operations are found in Interpretation Bulletin IT-364. Paragraph 2 of IT-364 provides general comments on when a contemplated business becomes an actual business. It states that "... Where an activity consists merely of a review of various business possibilities in the expectation or hope that information will be obtained to justify going into business of some kind, such an activity does not represent the commencement of a business. ..." It also states that "... it is the Department's view that a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations.

We trust that these comments will be of assistance.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch