2 December 1998 External T.I. 9829955 - SMALL BUSINESS CORPORATION

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: Is a corporation’s pension surplus an asset “used principally in an active business carried on primarily in Canada”?

Position: Such a determination is a question of fact but it seems that such an asset would not be used in an active business carried on primarily in Canada.

Reasons: IT-486R and most of our correspondence on “the use of an asset” state that it is a question of fact. The accountant stated in his letter that the surplus cannot be used in the corporation’s business or otherwise. Therefore, the pension surplus would not be an asset “used principally in an active business carried on primarily in Canada”.

XXXXXXXXXX 		982995
J. E. Grisé
Attention: XXXXXXXXXX 

December 2, 1998

Dear Sirs:

Re: Small Business Corporation

This is in reply to your letter of November 16, 1998, requesting a technical interpretation related to whether a pension surplus asset qualifies as an asset “used principally in an active business carried on primarily in Canada” for the purposes of determining whether a corporation is a “small business corporation” as defined in subsection 248(1) of the Income Tax Act.

You are of the view that the actuarial surplus likely represents unrecorded goodwill associated with the business. You then contend that it is our position that unrecorded goodwill is considered to be an asset used principally in an active business and as a result the pension surplus qualifies as an asset used principally in an active business.

The determination of whether an asset (e.g., cash, building or goodwill) of a corporation is “used principally in an active business carried on primarily in Canada,” is one of fact which must be determined based on all the relevant facts and details of a particular case. The relevant facts and details will include the actual use to which the asset is put in the course of the business, the nature of the business involved and the practice in the particular industry.

We doubt that the value of a pension surplus could correctly be considered as forming part of the unrecorded goodwill of a corporation. The fact that the corporation would only be entitled to the pension surplus in the event that the plan were dissolved may have some bearing on the fair market value of the pension surplus to the corporation but does not negate the fact that the pension surplus is an asset of the corporation.

It is our view that it would be difficult to establish that the pension surplus is “used principally in an active business carried on primarily in Canada” since, as you have pointed out, the corporation is unable to access any of the actuarial surplus for use in its business or otherwise unless an approved wind-up of the plan is implemented. A pension surplus is an asset that is regarded more as an investment that would never be available to be used in an active business.

We hope our comments are helpful but since they do not constitute an advance income tax ruling, are not binding on the Department with respect to any particular transaction.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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