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:
Definition of Qualified Small Business Corporation Shares and when cash or near cash property will be considered to be used in the course of an active business.
Position:
No position taken due to lack of information, only general comments provided.
Reasons:
We were not provided enough information to provide an advance ruling, therefore taxpayer agreed to accept general comments.
5-973325
XXXXXXXXXX Karen Power, C.A.
Attention: XXXXXXXXXX
February 6, 1998
Dear Sirs:
Re: Advance Ruling Request
We are writing in response to your letter dated December 3, 1997, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX. Specifically, you ask whether or not XXXXXXXXXX is eligible for the $500,000 capital gains exemption.
As discussed on January 21, 1998 (XXXXXXXXXX\Albert), an advance ruling is a written statement given by the Department to a taxpayer stating how it will interpret specific provisions of existing Canadian income tax law in its application to a definite, proposed transaction or transactions which the taxpayer is contemplating. Full disclosure is required and where the transaction is to be completed at some indefinite future time or where satisfactory evidence is lacking that a proposed transaction is being seriously contemplated the request for an advance ruling may be refused. Additionally, where a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request for the advance ruling an advance ruling will not be granted.
As it was unlikely that an advance ruling could be issued because of the numerous questions of fact that need to be resolved, you agreed to withdraw your ruling request. A refund of your deposit will follow shortly. In the event that you should later decide to re-submit a ruling request on this matter or a similar matter, we suggest that, in addition to the above requirements, the relevant documents and other information referred to in paragraphs 16(a) to (n) of Information Circular 70-6R3 be submitted with your request. A copy of IC 70-6R3 is enclosed for your files.
Although an advance income tax ruling will not be issued on this matter, we have agreed to provide you with the following general comments with respect to the definition of a "qualified small business corporation share" ("QSBCS") in subsection 110.6(1) of the Income Tax Act (the "Act").
The following are 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. We stress that the following guidelines are necessarily of a general nature and that the Department will make its determination on a case-by-case basis.
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.
Cash or near cash property is considered to be used principally in the business if its withdrawal would destabilize the business.
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.
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.
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.
Cash or near cash property is considered to be used principally in the business if its retention fulfills a requirement which had to be met in order to do business, such as certificates of deposits required to be maintained by a supplier.
The Department recognizes that prudent financial management requires businesses to maintain current assets (including inventories and accounts receivable, 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.
You have also asked us to comment on the application of the general anti-avoidance rule with respect to your proposed transaction. We note that example 3 of Supplement 1 to Information Circular 88-2 "General Anti-Avoidance-Rule" (a copy which is enclosed) describes a transaction which is similar to your proposed transactions. The Department's position with respect to transactions involving a simple transfer of shares to a related corporation would not be viewed as an abuse of the Act read as a whole.
Although we cannot comment further on the situation you describe, by reason of the limited information you have provided, we caution that any of subsections 84.1(1), 110.6(7) or 110.6(8) of the Act may apply where shares are sold.
We trust our comments will be of assistance to you.
Roberta Albert, C.A.
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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