22 May 1996 External T.I. 9604585 - ASSETS USED IN ACTIVE BUSINESS

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 amount of cash and investments of corporation may be reduced by amount of loan from shareholders so that 90% of fmv test of assets can be met.

Position:

Question of fact whether cash is used in active business, but fact that it is borrowed from shareholders is irrelevant.

Reasons:

Wording of "small business corporation" definition refers to fmv of asset - no offset permitted.

		960458
XXXXXXXXXX	P. Spice

Attention: XXXXXXXXXX

May 22, 1996

Re: "Small Business Corporation"

This is in reply to your facsimile transmission of January 30, 1996, which was forwarded to us by the Regina Tax Services Office. We apologize for the delay in replying. You ask whether an amount associated with certain of a corporation's inactive assets may be reduced by an amount of a liability. Your question relates to the requirement in the definition of "small business corporation" in subsection 248(1) of the Income Tax Act (the "Act") that substantially all of the fair market value of the corporation's assets is attributable to assets used in an active business.

The example you give is quite specific and it appears that it may relate to an actual or proposed transaction. Assurance as to the tax consequences of a proposed transaction can only be given in response to a request for an advance income tax ruling. Confirmation concerning past transactions must be obtained from the local tax services office. Furthermore, whether a corporation is a "small business corporation" at a particular time is a question of fact which cannot be made without a thorough examination of all the relevant facts and a review of its day-to-day activities. Such examinations are usually carried out by officers from the tax services office. Although we cannot provide an opinion which is binding on the Department, we can provide the following general comments.

Whether certain assets are used in an active business is a question of fact. It is our view, however, that where an asset, such as cash temporarily surplus to the needs of a business, is invested in short-term income producing investments, those investments may be considered to be used in the business. Where on the other hand substantial amounts of cash and deposits which are obviously in excess of that required for use in the business are retained in the corporation on a permanent basis, they would not be considered to be funds used in the business. Rather such funds would be considered as permanently set aside for investment or non-qualified uses (i.e., uses other than for active business). Please refer to the comments in paragraph 5 of IT-486R. Whether the cash and investments were obtained through loans from shareholders would be irrelevant to a determination of their use in an active business.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch