7 May 1991 Income Tax Severed Letter - Qualified Small Business Corporation Shares

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.

Dear Sirs:

Re: Qualified Small Business Corporation Shares

This is in reply to your letter dated February 28, 1991, requesting our opinion as to whether funds raised by a Canadian controlled private corporation (CCPC) pursuant to a private offering of securities would be considered assets used in an active business carried on by the corporation.

Facts

The hypothetical facts of the situation follow:

• 1. XXX
• 2. XXX
• 3. XXX
• 4. XXX
• 5. XXX

Issue

Your enquiry asks whether it is our view that the cash proceeds of the offering are being used in the corporation's business as soon as they are released to the corporation.

You are of the view that the funds should be considered to be assets used in carrying on the active business of the corporation for the following reasons:

XXX

Our Comments

In accordance with Information Circular 70-6R2, paragraph 6, we are unable to provide a written opinion with respect to a proposed transaction. Proposed transactions relating to particular taxpayers are more appropriately the subject of an advance income tax ruling request, the guidelines for which are set out in the above-noted circular.

Whether assets are used in an active business is a question of fact. In order to make such a determination, it is necessary to have knowledge of all the facts surrounding a particular situation. Therefore, our comments in this letter are comments of a general nature which may be of assistance to you.

It is our view that where cash is temporarily surplus to the needs of a business and is invested in short-term income-producing investments, those investments may be considered to be used in the business. On the other hand, where substantial amounts of cash and deposits - 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. Such funds would be considered to be permanently set aside for investment for uses other than in an active business. This position is consistent with comments in paragraph 8 of IT-73R4, paragraph 29 of IT-268R3 and paragraph 5 of IT-468R.

Generally cyclical cash and short-term investments upon which interest income earned is treated as active business income, may, depending on all of the circumstances, be considered to be used in an active business for purposes of the definition of "small business corporation" in the Income Tax Act. However, as indicated above, the foregoing is an expression of our opinion and should not be construed as an advance income tax ruling.

We trust our comments will be of assistance to you.