15 September 1994 External T.I. 9418185 - TRADER OR DEALER - VENTURE CAPITAL CORPORATIONS

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 a venture capital corporation would qualify as a dealer or trader in securities within the meaning of paragraph 39(5)(a) of the Act.

Position TAKEN:

Question of fact but very likely.

Reasons FOR POSITION TAKEN:

In the Department's view, venture capital corporations are not passive investors but rather are carrying on the business for which they were incorporated. Generally, they acquire shares either as part of their business or as an adventure in the nature of trade.

			5-941818
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

September 15, 1994

Dear Sir:

Re: Venture Capital Corporations - Subsection 39(4) of the Income Tax Act

We are writing in reply to your letter of July 13, 1994 wherein you requested our comments on the tax treatment of profits and losses of venture capital corporations and the ability of such corporations to make an election under subsection 39(4) of the Income Tax Act (the "Act").

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.

As regards the profits and losses of venture capital corporations, it is still the Department's view that profits and losses attributable to a venture capital corporation's business are on income account since venture capital corporations are not passive investors but rather are carrying on the business for which they were incorporated.

With respect to the subsection 39(4) election, in the Vancouver Art Metal Works Ltd. v. Canada, 93 D.T.C. 5116; (1993) 1 C.T.C. 346 (F.C.A.) case, the Court held that a taxpayer loses the right to elect under subsection 39(4) of the Act when he or she is a trader or dealer in securities, that is to say, when the taxpayer professionally engages in the business of dealing in securities or when his or her dealings amount to carrying on a business and can no longer be characterized as investor's transactions or mere adventures or concerns in the nature of trade. Whether a venture capital corporation's activities amount to carrying on a business is a question of fact. However, in light of the Department's position set out above, it is likely that we would consider a venture capital corporation to be a "trader or dealer in securities" within the meaning of paragraph 39(5)(a) of the Act, unless the facts clearly indicated that the securities were acquired, not as part of the venture capital corporation's business, but as an adventure in the nature of trade.

Unless as otherwise stated, all references to statute are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.

We trust that these comments will be of assistance.

Yours truly,

A.M. Brake
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch