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 shares are "qualified small business corporation shares" Do the cash and marketable securities constitute assets used principally in an active business.
Position:
The cash and marketable securities may constitute active business assets. Not enough facts to determine whether or not the shares qualify as QSBCS.
Reasons:
If a corporation has significant short term cash reserves to fund both the research and development activities of a corporation over its next business cycle and the acquisition of a new research facility, we would generally consider the cash reserves to be an active business asset, provided the corporation actually uses the cash reserves for these purposes within a reasonable period of time.
5-980192
XXXXXXXXXX Karen Power, C.A.
Attention: XXXXXXXXXX
February 16, 1998
Dear Sirs:
Re: Qualified Small Business Corporation Shares
We are writing in reply to your letter of December 22, 1997 in which you requested our views as to whether shares of XXXXXXXXXX engaged in research would be "qualified small business corporation shares" as defined in subsection 110.6(1) of the Income Tax Act (the "Act").
You have provided us with the following facts:
The ownership of the voting shares is as follows:
XXXXXXXXXX
The total assets of the company are approximately $XXXXXXXXXX, the assets are made up as follows:
Cash and Marketable Securities XXXXXXXXXX%
Equipment, Patents and Licenses XXXXXXXXXX%
Accounts Receivable XXXXXXXXXX%
R&D Tax Credit Revenue XXXXXXXXXX%
Income Tax Receivable XXXXXXXXXX%
The shares of the corporation will have been held by the individuals for a period in excess of 24 months prior to disposition.
The cash and marketable securities are used in the course of the business. The company is engaged in research and development and as such needs a high reserve of cash for the following reasons:
The company needs between $XXXXXXXXXX ("BURN RATE") a month for its research and development activities or $XXXXXXXXXX over the next two years. The company's normal business cycle is between two to three years.
The company is building a research facility that will cost approximately $XXXXXXXXXX and will take between 6 months to a year to construct. As a result of the required sterile conditions the company has to be its own general contractor.
A strong balance sheet is needed to attract and retain the best scientific minds around. The withdrawal of the cash and marketable securities will result in an exodus of these key scientific minds, thus destabilizing the company.
A strong balance sheet is needed to protect against potential predators. If a potential predator knows that the company has the financial resources to protect its proprietary information they are less likely to infringe on a patent.
It is very costly and time consuming to continuously approach capital markets for funding. Thus a $XXXXXXXXXX offering would be cost effective, practical and would meet the company's needs for the upcoming business cycle.
The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following general comments which may be of some assistance to you.
One of the requirements of a "qualified small business corporation share" is that at the "determination time", the corporation must be a small business corporation. A small business corporation is defined in subsection 248(1) of the Act, at any particular time, means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it. In our view, all or substantially all means at least 90% of the assets must be used in the active business of the corporation. Thus, if more than 10% of the assets are non-active, that is, not used (in the normal sense of that word) in the business, the corporation is not a small business corporation.
Based on your facts, your main concern appears to be whether or not the cash and marketable securities 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 Act.
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:
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.
We stress that the above guidelines are necessarily of a general nature. Whether the cash and marketable securities will be considered to be used in the course of an active business can only be determined after an examination of all the relevant facts in the particular situation in a retrospective basis. This examination would normally be done by our District Taxation Offices in the course of tax audits.
Where, as in the situation you describe, a corporation has significant short term cash reserves to fund both the research and development activities of a corporation over its next business cycle and the acquisition of a new research facility, we would generally consider the cash reserves to be an active business asset, provided the corporation actually uses the cash reserves for these purposes within a reasonable period of time. 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 we have not examined all of the requirements which must be met pursuant to subsection 110.6(1) of the Act, for shares to qualify as "qualified small business corporation shares".
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
- 5 -
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, 1998
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, 1998
Email this Content