5 September 1990 Income Tax Severed Letter ACC9728 - Canadian Investment Income

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.

C. Claerhout                    Rulings Directorate
A/Chief of Audit                L.A. McCarron-McCuire
LONDON DISTRICT OFFICE 17       (613) 957-2092

Attention:   Brian Deacon
             Large Files   FILE  901336

SUBJECT:           24(1)                 the "taxpayer"
         "Canadian investment income "

We are writing in response to your memorandum dated June 5, 1990, regarding the method of calculating the "Canadian investment income", as defined in paragraph 129(4) (a) of the Income Tax Act (the "Act"), of the taxpayer.

Both your memorandum and the taxpayer's submission dated May 3, 1990 refer to the taxpayer's "investment base". We understand this term to mean the funds of the taxpayer that do not constitute property that is:

(a) incident to or pertains to an active business carried on by the taxpayer, or

(b) used or held principally for the purpose of gaining or producing income from an active business carried on by it.

Our comment below are based on the assumption that the investment activities the taxpayer do not constitute a separate business. While the level of investment activities raises the suspicion that they may constitute a separate business, we do not have sufficient information to enable us to reach any conclusion on this point.

If the investment activities do constitute a separate business of the taxpayer, then it will be necessary to determine whether it constitutes a "specified investment business" within the meaning assigned by paragraph 125(7)(e) of the Act. If such separate business would not constitute a specified investment business, then the income therefrom would be excluded from the taxpayer's Canadian investment income by virtue of paragraph 129(4.1) (a) of the Act.

Issue 1

                            24(1)

At issue is

                             24(l)

It is your opinion, based on a Head Office Appeals Branch memorandum dated February 10, 1984, that the investment base should be the minimum balance at any time in the fiscal year.

Cash and short-term investments will not form part of the investment base where they are held or used principally for the purpose of carrying on an active business. As a general rule, the maximum amount of short-term investments that we would consider to be in excess of business requirements having regard to the cyclical nature of the business would be the minimum balance of such investments time outing the business cycle. However, as the February 10, 1984 Head Office Appeals memorandum suggests, where it can be demonstrated that the cash and short-term investments were not held for the purpose of use in the business, but for some other purpose, such as

(a)       the making of an investment that is not incidental to and 
          does not pertain to the active business of the taxpayer; 
          or

(b)       the payment of dividends to shareholders, then the cash
          and short-term investments so used should be considered
          to have been in excess of business requirements and
          should be included in the taxpayer's investment base
          until such time as they were so used. 

In the situation you describe,

                  24(1)

Issue 2
                                   24(1)                       

Our comments in response to Issue 1 regarding the use of the
minimum yearly balance of short-term investments in determining the
taxpayer's investment base are relevant.                          
            24(1)

Issue 3:

                              24(1)

You indicate that the use of this method to determine Canadian investment income is supported by two Head Office memoranda, dated September 18, 1980 and February 10, 1984, from Publications Division and Appeals Branch, respectively.

While the minimum month end balance method will ordinarily provide a practical measure of a taxpayer's investment base, exceptions will occur where an attempt must be made to determine which funds were not used, held or required for use in the business of the taxpayer during the normal business cycle, having regard to cyclical business fluctuations. `For instance,' where investments produce income which is not used or required for use in the business, having regard to its cyclical nature, but is reinvested to earn additional income from property, the amounts so reinvested may properly be included in the investment base of the taxpayer.

Issue 4:

                               24(1)                              
You find support for your position in the following statement in
paragraph 5 of Interpretation Bulletin 
IT-73R4
:  "Where a
corporation was incorporated to earn income by carrying on a
business, there is a general presumption that profits arising from
it's activities are derived from a business."

The presumption that income earned by a corporate taxpayer in the exercise of its duly authorized objects is income from a business is a rebuttable presumption. The presumption merely shifts the onus to the person, in this case the taxpayer, asserting that the income of the corporation is not income from a business but income from some other source. It may be rebutted, for instance, where the activity of the corporation is unrelated to the business that the corporation was incorporated to carry on and does not constitute a separate business. (As indicated above, we assume that the taxpayer does not carry on a separate investment business.

If it does, then it is a question of fact whether the shareholder
loans pertain to that business and whether such business qualifies
as a "specified investment business" within the meaning of
paragraph 125(7)(e)).
                                   24(1)

Issue 5:
                             24(1)                       based on
the following comments from paragraph 3 of Interpretation Bulletin
IT-73R4
:

          "Where the original gain on the sale of real
          property  was categorized in a previous year
          as income from an active business, amounts
          included in income in subsequent years in
          respect of the realization of the mortgage    
          reserve pursuant to subparagraph 12(l) (e)
          (ii) are considered to be income from an
          active business.  This also applies to any
          mortgage interest received pertaining         
          to such mortgage."                            
                      24(1) 

In our view, the fact that a paragraph 20(l)(n) reserve is taken is
not determinative of the tax treatment of the interest income.  The
relevant factor is not the fact that a reserve is claimed in
respect of the sale proceeds which are subsequently brought into
income under subparagraph 12(1)(e)(ii), but the fact that,        
                       24(1)
                            21(1)(b)

Issue 6:

                              24(1)

Issue 7:

                              24(1)

Corporations often invest in short-term instruments in order to ensure the availability of funds for use in its business. Short-term investments are thus ordinarily considered not to be in excess of a taxpayer's requirement for funds for use in its active business and are thus ordinarily excluded from the investment base of the taxpayer. However, exceptions will occur where, for instance, short-term investments are made not in order to keep funds available for use in the business, but solely in order to earn a better return than can be earned on long-term instruments. In such instances the classification of an investment by the length of its' term may not be particularly helpful in determining whether the invested funds pertain to or are incident to an active business of the taxpayer or are held or used principally for the purpose of gaining or producing income from the active business of the taxpayer.

To the extent that the aggregate amount of the funds invested, whether in short-term or in long-term instruments, exceeds the funds used or required for use in the taxpayer's active business, having regard to the cyclical nature thereof, they should be included in the taxpayer's investment base.

Issue 8:
                                24(1)

As discussed above in our response to Issue 5, where the property in question is a receivable that arose on the sale of property in the course of the taxpayer's business, there is a strong presumption that the property is a property that is described in paragraph 129(4.l)(b) of the Act. Whether or not the presumption is rebutted in a particular cases question of fact that must be determined having regard to all of the circumstances.

                            24(1)
Issue 9:

                                  24(1)

Please do not hesitate to contact us should you have any questions arising out of the above comments.

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