9 September 1988 Income Tax Severed Letter 5-6045 - [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.

Wyman W. Webb (613) 957-2109

SEP 9 1988

Dear Sirs:

Re: Small Business Corporation

This is in reply to your letters of May 13, 1988 and June 10, 1988 in which you asked for our opinion on various matters related to the definition of small business corporation as contained in subsection 248(1) of the Income Tax Act (the "Act"). We will first deal with the question raised in your letter of May 13, 1988. In this letter you describe the following hypothetical situation:

1) A corporation (A Co.) is a Canadian-controlled private corporation, within the meaning of paragraph 125(7)(b) of the Act.

2) The assets of A Co. are:

Term deposits                                                           $ 265,000
Inventory                                                                           3,000
Amounts due from related companies                   1,424,000
Prepaid expenses                                                             5,000

Fixed assets, at cost                                                   $442,000
Less depreciation                                                         228,000
                                                                                         214,000
Investment in subsidiary                                               10,000
Deferred income taxes                                                  16,000
                                                                                     1,937,000

3) A Co. carries on a business in Canada. A Co. operates 3 establishments in Canada and also provides management and administrative functions for a 100% owned U.S. subsidiary and its two subsidiaries, also in the U.S. The U.S. subsidiary operates various establishments in the U.S. and its two subsidiaries carry on the same business.

The U.S. operations include approximately 160 establishments. Certain functions that require day to day supervision in the U.S. are done by employees of the U.S. companies. These employees report to the Canadian head office.

Daily telephone contact with each location regarding sales, cash deposits, customer flows, coupon redemption, employment applications, hiring and scheduling are all handled by the Canadian company. In addition, all accounting functions as well as central control and management are in Canada.

4) A Co. charges the U.S. companies a fee for the functions outlined in (3) and these charges are reflected in the amounts due from related companies of $1,424,000. The amounts due are paid to A Co. on a regular basis.

5) A Co. employs more than five full-time employees throughout the year.

6) The fixed assets are comprised of furniture and equipment that are used in the business.

You have asked for our opinion on whether the amounts that are due to A Co. from related companies, as referred to above, would constitute assets used in an active business carried on primarily in Canada by A Co., for purposes of the definition of small business corporation in subsection 248(1) of the Act.

It is a question of fact whether a particular asset of any company is used in an active business carried on primarily in Canada by the company. This question of fact can only be determined after an examination of all the relevant facts of a particular situation. Therefore we are not providing any comments or opinions on whether the amounts due from related companies described above would qualify as assets used in an active business carried on primarily in Canada by A Co., for the purposes of the definition of small business corporation in subsection 248(1) of the Act. We are, however, able to provide the following general comment. It is our opinion that, in general, accounts receivable of a company that directly relate to an active business carried on primarily in Canada by the company and that have arisen as a direct result of such business, will themselves be considered to be assets used in an active business carried on primarily in Canada by such a company for the purposes of the definition of small business corporation in subsection 248(1) of the Act.

With respect to your letter of June 10, 1988, the situation that is described therein appears to involve a series of actual proposed transactions. It is not the Department's practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R. We are, therefore, unable to provide any comments with respect to the application of any provision of the Act to or as a result of any of the proposed transactions set out in this letter. Should you wish to request an advance ruling on these or other transactions which may be proposed by your clients, please refer to Information Circular 70-6R (a copy of which is enclosed) for the procedure to be followed. In particular please note paragraphs 15 and 16 of the circular, which state the requirement for the submission of full details of all relevant facts, including the identities of all individuals and companies involved and full details of the proposed transactions and of the particular sections of the Act for which you are requesting an advance ruling.

For your information we are also enclosing a copy of each of ATR-27 and ATR-32 which are two recently published income tax rulings. These rulings illustrate the format that is followed in providing advance income tax rulings. Requests for rulings should be prepared in a similar format and with a similar level of detail. The names of the individuals and corporations involved have been disguised in these published rulings so that the ruling could be published without identifying the individuals and companies involved. In the actual advance income tax ruling upon which these published rulings are based, the individuals and corporations involved were identified.

Our comments herein are not rulings, as explained in paragraph 24 of Information Circular 70-6R.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

Enclosures