Small Business Corporation

Cases

Ollenberger v. Canada, 2013 DTC 5064 [at 5863], 2013 FCA 74

active business included passive business

The taxpayer was entitled to recognize a business investment loss on a loan owing to him by a Canadian-controlled private corporation ("AES") which was not repaid. The trial judge erred in finding that "active business" in the small business corporation definition meant anything more than "any business carried on by the taxpayer," as set out in the applicable part of the definition of "active business" in s. 248(1), i.e., there was no basis for the Minister's contention that the business must be "active" in the ordinary sense of that word.

As the Minister effectively acknowledged in the Amended Reply that AES carried on a business, the requirements of the definition were satisfied.

Weaver v. Canada, 2008 DTC 6517, 2008 FCA 238

previous active business not relevant

The taxpayers each owned 25% of the shares of a Canadian-controlled private corporation that leased manufactured homes on Indian-reserve lands that were leased to it. The corporation did not qualify as a small business corporation. In determining that the business of the corporation was a specified investment business, Sharlow, J.A. noted (at para. 26):

"The key question is whether the principal purpose of that business at that time was to derive income from property (such as rent). It is not relevant that [the corporation] carried on an active business before that time."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business rent from trailer park now only income source 175

Boulanger v. HMQ-Canada, 2004 DTC 6192, 2003 FCA 332

A corporation's only assets since 1992 had comprised a vacant property and a sum owing for the sale of one-half of another property that originally had been intended for the operation of a business. In these circumstances, the Tax Court had not erred in concluding that the corporation did not qualify as a small business corporation when the taxpayers disposed of their shares in 1996.

Hudon v. Canada, 2001 DTC 5630, 2001 FCA 320

In the years in question a corporation ("Hall River") which owned forest concessions and rights to develop the hydro electric potential of a river was engaged in negotiations with Hydro-Quebec and other activities with a view to developing that potential. The Court reversed the finding of the Tax Court that Hall River was not carrying on business. Desjardins J.A. stated (at p. 5639) that "to require the existence of an agreement on the sale of electricity before Hall River may be considered to be 'carrying on business' is to add an element not found in the legislation" and noted that the exemption for the disposition of qualified small business corporation shares found in s. 110.6(2.1) of the Act was intended to unleash the entrepreneurial dynamism of individual Canadians.

See Also

Hébert v. The Queen, 2018 CCI 48

corp qualified as SBC where only business activity was unsuccessful efforts to sell its stock of equipment

The market for the business of a corporation (“Radio Progressive “) of the taxpayer (Mr. Hébert) of selling and repairing radio telecommunication equipment for use mostly by amateurs had virtually disappeared by 2007. From that time on, it did not make any sales, and essentially its only activity related to Mr. Hébert’s efforts to sell off its inventory out of his home. It was dissolved in August 2011. In finding that Radio Progressive qualified as a “small business corporation” so that (having regard to the 12-month look-back rule in the postamble to the definition of that term) the loss realized by Mr. Hébert from his disposition of its shares in August 2011 qualified as a business investment loss, Ouimet J stated (at paras. 19-22, TaxInterpretation translation):

[19] In this case, the Court is of the view that Radio Progressive was carrying on an active business during the 12 months preceding its dissolution, namely in the 2010 and 2011 taxation years, despite the fact that its activities were minimal. …

[20] Essentially, based on the evidence, Radio Progressive remained active in the years prior to its dissolution only in order to dispose of its stock of unsold radio communication equipment and parts. Since Radio Progressive's commercial activities had been, since its creation, the sale and repair of radio communications equipment, the assets that the corporation still owned were related to its commercial activities.

[21] Given the nature of the corporation’s business activities and income, it is difficult to conceive of what more Mr. Hébert could have done to sell the Radio Progressive stock. He maintained a website that displayed the remaining inventory and responded to e-mails and calls from potential customers, all with the intention of selling the remaining assets.

[22] Based on the evidence, the market for the Radio Progressive stock was very limited. The minister cannot blame Mr. Hébert for not having done more to sell the Progressive Radio stock; and, as it turned out, its business income was non-existent. The evidence shows that Mr. Hébert did what he could to try to sell the stock until it no longer had market value.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) 143
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs attempted sale of assets previously used in an active business represented the continued carrying on of that business 81

McDowell v. The Queen, 2012 DTC 1206 [at 3553], 2012 TCC 244

The taxpayer made a $1.15 million loan in 2002 to a corporation that was wholly owned by her spouse. The corporation had not conducted any business since 2004, and the Court confirmed that the loan became uncollectible in 2007. Given that the loan became uncollectible more than 12 months after the corporation ceased to carry on business, Woods J. found that the taxpayer was ineligible for an allowable business investment loss.

The taxpayer relied on authorities which provided that a company that is temporarily dormant may still be carrying on an active business. Woods J. stated that this argument would assist the taxpayer "only if the cessation of [the] business was considered to be temporary sometime after December 31, 2006" (para. 13).

Borys v. The Queen, 2005 DTC 1069, 2005 TCC 397

Before going on to find that the taxpayer had provided evidence that amounted to a prima facie case that a loss realized by it on a debt owing to it by a corporation was a business investment loss, Bowman C.J. noted (at p. 1072):

"There is authority to support the view that merely because a company is in a period of inactivity it may still be carrying on a business .... it seems, at first blush, unreasonable to assume that for a taxpayer to be allowed an ABIL the debtor company must have to be carrying on an active business when the debt went bad."

Martel v. The Queen, 2003 DTC 1187 (TCC)

The assets of a Canadian-controlled private corporation ("Gestion") consisted of the shares of two companies, the first of which ("2321") was leasing a building for use in the active business of the second corporation ("3104"). In finding that 3104 was related to 2321, Tardif T.C.J. noted that all the issued and outstanding shares of 2321 and 3104 were held equally by Gestion and an individual and, after indicating that the definition of related person in s. 256(1.2) codified the rule in Buckerfield's as to what constituted a group, Tardif T.C.J. found that the two corporations were related.

As 2321 qualified as a small business corporation, Gestion itself qualified as a small business corporation, so that a loss realized by the taxpayer on an advance to Gestion qualified as a business investment loss.

Klein v. The Queen, 2001 DTC 443 (TCC)

Lamarre T.C.J. rejected a submission that a corporation ceased to be a small business corporation when a receiver-manager was appointed by the debenture holders given that there were some indications that the receiver-manager was acting not only as agent for the secured creditors but also as an agent of the corporation and its corporate partner in relation to the business of a partnership that they had been carrying on for the purpose of managing that business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) debt of partnership is owed by partners 163
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) debt of common law partnership is owed by its partners 112

Vogel v. The Queen, 96 DTC 1321 (TCC)

A corporation which previously had earned income from commissions by negotiating contracts for various commodities and that prior to the taxation year in question had become insolvent and reported to the Alberta corporate tax administration that it had ceased operations nonetheless was found to be carrying on business because it still had assets, liabilities and contracts to pursue and some minimal expenses had been incurred as it tried to negotiate contracts on a local basis in Alberta. Accordingly, losses sustained by the taxpayer on loans made to the corporation qualified as business investment losses.

Benson v. Third Canadian Investment Trust Ltd. (1993), 14 OR (3d.) 493 (Ont. Ct. (G.D.))

Farley J. found that the sale pursuant to a share exchange offer for the direct and indirect shareholding of a closed-end investment company ("TCGIT") in another closed-end investment company ("CGI") that represented approximately 2/3 of the market value of the assets of TCGIT would constitute a sale of substantially all the assets of TCGIT given that the sale would radically and fundamentally alter TCGIT because the underlying assets of CGI would be managed by the acquirer under a significantly different fee arrangement, and TCGIT would lose the benefit of effective control over CGI. Accordingly, a two-thirds majority resolution of the shareholders of TCGIT was required.

Words and Phrases
substantially all

Balz Estate v. MNR, 92 DTC 1472 (TCC)

A promissory note held by the subsidiary of a holding company, which had been received as consideration for the disposition of its business assets, was not itself a business asset. Short term deposits and cash of the holding company also were investment property.

Sarchuk J. after referring to IT-486R also noted (p. 1478) that "in reality the phrase 'all or substantially all' does not readily lend itself to any form of simple mathematical formula".

Administrative Policy

25 January 2018 External T.I. 2017-0717561E5 - specified small business corporation

excess cash not an active business asset

CRA set out general guidelines on when cash held by a corporation would be considered to be used in an active business carried on by it for purposes of the “specified small business corporation” definition in Reg. 4901(2) (respecting qualification of its shares for RRSPs). The listed factors (which are similar to those applied by CRA in other contexts) included:

  • Cash or near cash property is considered to be used principally in the business if its withdrawal would destabilize the business.
  • Cash which is only temporarily surplus to the business needs may qualify.
  • Cash balances which accumulate only to be depleted in accordance with the annual seasonal fluctuations of the business will generally qualify – but a permanent balance in excess of the company's reasonable working capital needs will generally not qualify.
  • Funds will not qualify by virtue only of being accumulated to purchase capital assets or repay long-term debt.
Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 4901 - Subsection 4901(2) - Specified small business corporation guidelines on when cash is used in an active business 278

7 October 2016 APFF Financial Strategies and Financial Instruments Roundtable Q. 9, 2016-0651801C6 F - Assurance-vie à assurés multiples-110.6(15)

corporate-owned policy valued for SBC or QSBCS purposes at the cash surrender value even if non-shareholder lives are included

S. 110.6(15)(a) provides that a shareholder’s shares are to be valued for various listed purposes including the “small business corporation” definition on the basis that a life insurance policy owned by the corporation on the shareholder’s life is to be valued at its cash surrender value. CRA has confirmed that 110.6(15)(a) applies even where the corporate policy covers lives other than that of the shareholder, e.g., the payout occurs on the death of both the shareholder and a key employee, or on the survivor of the shareholder and his spouse.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(15) - Paragraph 110.6(15)(a) corporate-owned policy is valued at CSV even if non-shareholder lives are included 189

7 October 2016 APFF Roundtable Q. 11, 2016-0652941C6 F - Contrat de location / Capital lease

FMV of rights under a lease must be included

Is the asset recorded in the financial statements as a capital lease considered as an asset used in an active business for purposes of the definitions of a qualified small business corporation share or of a small business corporation? CRA responded:

[T]hese accounting entries should not be taken into account in determining whether a share is a QSBCS or whether a corporation is an SBC.

However…account must be taken of the FMV of the rights in the lease in determining whether a share is a QSBCS or whether a corporation is an SBC.

To determine whether or not the rights in a lease are an asset used principally in an active business carried on by the corporation, the use of the property which is the subject of the lease must be considered.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share stipulated rights of lessee should be valued for QSBCS purposes 93

S4-F8-C1 - Business Investment Losses

"substantially" and "principally"

1.15 For income tax purposes, the term all or substantially all is understood to mean at least 90%, and the terms principally and primarily to mean more than 50%.

6 March 2015 Internal T.I. 2014-0549761I7 - Internally generated goodwill & excluded property

unpurchased goodwill is taken into account

Before going on to indicate that internally generated goodwill is considered in determining whether shares of a foreign affiliate of a corporation resident in Canada qualify as "excluded property" of another foreign affiliate of the corporation, CRA stated:

[T]he "all or substantially all" test will normally be satisfied if assets representing at least 90 percent of the fair market value of the assets of the corporation are used in an active business carried on by it. The assets of the corporation include goodwill, whether or not such goodwill has been purchased.

See summary under s. 95(1) – excluded property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 149 - Subsection 149(10) unpurchased goodwill is taken into account 92
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Excluded Property unpurchased goodwill is taken into account 193

11 October 2013 Roundtable, 2013-0499671C6 F - Actif d'impôts futurs / Future income tax assets

future income tax asset is not an asset – tax receivable is, but is an active business asset if it arose from active business

Is a future income tax asset an asset used in an active business for the purposes of the definition of qualified small business corporation share in s. 110.6(1) and of small business corporation in s. 248(1)? CRA responded (reversing 2000-001582 and 2008-028530):

[A[ future income tax asset is not an asset for the purposes of the definition of QSBCS and the definition of SBC. …

Furthermore, where a future income tax asset becomes a tax receivable, this tax must be considered as an asset in determining whether a share is a QSBCS or if a corporation is a SBC. The tax receivable may be an asset used in the active carrying on of a business for [such] purposes … . For example … tax receivable due to the carryback of a loss from an active business is an asset used primarily in the business that the corporation is actively carrying on for purposes of both definitions. …

The same interpretation applies to deferred tax assets.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share - Paragraph (c) - Subparagraph (c)(i) future income tax asset is not an asset/tax receivable can be used in an active business 105

11 October 2013 APFF Roundtable, 2013-0495631C6 F - Actions admissibles de petites entreprises

90% is generally a safe harbour, and in a particular context CRA may accept lower than 90%

Must the 90% level always be attained before the "substantially all" test is satisfied? CRA stated:

According to the jurisprudence, the interpretation of the term "all or substantially all" ... depends on the relevant legislative provision and the facts of each case. ...

...[T]he CRA ... usually consider[s] that the "all or substantially all" test is satisfied when a level of 90% or more is reached.

However, the test of "all or substantially all" could, depending on the circumstances and the context, be satisfied even if the 90% level is not reached. Where the 90% level is not attained, the CRA must consider each case in its particular context to determine if a threshold lower than 90% could satisfy the "all or substantially all" test.

Words and Phrases
substantially all
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share failure to satisfy the 50% test for even a moment in time will disqualify 127

17 July 2013 External T.I. 2012-0473261E5 F - Actif d'impôts futurs / Future income tax assets

tax receivable arising from carryback of NCL is active business asset cf. future tax asset

Is a future income tax asset an asset that is used principally in an active business carried on in Canada for purposes of the "qualified small business corporation share" ("QSBCS") and "small business corporation" ("SBC") definitions?

After indicating that there was "no significant difference" between the terms "future income tax assets" and "deferred tax assets" used in Chapter 3465 of Part II of the CICA Handbook, and in IAS 12, respectively, CRA stated (TaxInterpretations translation):

[A] future income tax asset is not an asset for purposes of the definition of QSBCS and of SBC. … However, when a future income tax asset becomes a tax receivable, such tax receivable must be considered as an asset for determining if a share is a QSBCS or a corporation is a SBC. The tax receivable can constitute an asset used in carrying on an active business…if it arises from the active carrying on of the business. For example … a tax receivable resulting from the carryback of a loss from an active business is an asset used primarily in the business carried on by the corporation... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share future (or deferred) income tax asset is not an asset until it becomes receivable, whereupon it may be attributable to active business 227

14 March 2013 External T.I. 2013-0473981E5 F - JVM d'une police d'assurance-vie - SEPE

corporate life insurance policy and proceeds therefrom valued at CSV until share redemption time

A corporation is the holder of a life insurance policy on its shareholder (Mr. X, who has an incurable illness) with a nil cost, a cash surrender value of $50,000 and a fair market value of $500,000. CRA indicated that, based on s. 110.6(15)(a)(i), the calculation of the fair market value of the assets of the corporation for purposes of determining whether it was a small business corporation should be done on the basis that those assets included the policy valued at its cash surrender value. Under s. 110.6(15)(a)(ii) the proceeds of the policy also would be ignored for such purposes except to the extent of the cash surrender value, provided that the proceeds were applied within 24 months to redeem shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(15) - Paragraph 110.6(15)(a) - Subparagraph 110.6(15)(a)(ii) proceeds of corporate life insurance policy in excess of CSV ignored for SBC purposes 289

5 October 2012 APFF Roundtable, 2012-0453991C6 F - Action admissible de petite entreprise

Quebec partnership also transparent notwithstanding separate patrimony

The query referred to Ville de Laval c. Polyclinique médicale Fabreville, s.e.c., 2007 QCCA 426 and Ferme CGR enr., s.e.n.c. (Syndic de), 2010 QCCA 719, where the Quebec Court of Appeal indicated that a partnership possessed a patrimony separate from its partners, and asked whether this altered the position in 9636835 that a corporation holding a partnership interest in a partnership carrying on an active business was in the same position as if it carried on the business directly. CRA stated (TaxInterpretations translation) that

[T]he concept of an autonomous patrimony of a partnership and its application to federal taxation is one which raises numerous questions. Accordingly, the CRA will continue monitoring the evolution of this issue.

Despite these developments, the CRA considers it preferable for the time being to continue applying the position stated in Technical Interpretation 9636835 in determining if the conditions contemplated in the definition of "small business corporation" are satisfied.

13 June 2012 Internal T.I. 2012-0435351I7 F - SEPE - chèques en circulation

outstanding and uncashed cheques did not reduce cash

In order to qualify as a SBC, Opco issued cheques to various suppliers. Do the issued and outstanding cheques, that have not yet been cashed, reduce the excess cash on hand of Opco? CRA responded:

Under the civil law in force in Quebec, the delivery of an outstanding cheque does not constitute payment … [and] the date of payment of a debt settled by cheque is considered to be the date on which the cheque is honored or paid by the bank … .

[Here] the cheques in circulation and not yet cashed do not constitute payments of the amounts due to Opco's suppliers and … consequently, there can be no reduction in the amount of the cash of Opco as long as the bank does not honor or pay such cheques.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt in Quebec, payment by cheque does not occur until debiting of bank account 116

13 June 2012 External T.I. 2012-0435351E5 F -

cheques not yet cashed

Cheques issued by Opco but not yet cashed would not reduce its cash on hand given that under the applicable law (the Quebec Civil Code), the issuance of a cheque does not constitute payment, so that the debt is not settled until the cheque is honoured.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt issuance of cheque not payment 46

27 March 2012 External T.I. 2012-0435101E5 - Small Business Corporation

s. 129(6) character preservation rule inapplicable

The deeming under s. 129(6) of property income to be active business income does not apply for purposes of the small business corporation definition, so that a Canadian-controlled private corporation which rents a substantial property to an associated CCPC will not qualify as a small business corporation even where the associated corporation carries on a Canadian active business.

8 January 2002 External T.I. 2001-009600 -

old trade receivable may not be active

The fact that an asset is a trade receivable does not, by itself, indicate that it is used principally in an active business. Although trade receivables generally are considered to be used in an active business because they are held to meet current cash flow or current working capital requirements, they were not so used where they remained outstanding for an extended period of time.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) 40

16 March 1998 External T.I. 5-960635 -

Where a portion of a lot is more than physically necessary to carry on a business and cannot be disposed because of zoning restrictions or because it is not suitable for any economic use, RC will not seek to deny that the lot is not being used principally in an active business.

Where a marina having foreshore water leases is required under the terms of the lease to own land contiguous with the foreshore lease, such land would be considered to be used in an active business because it is a condition precedent to the operation of the Marina.

4 July 1997 T.I. 9636835

In response to a question, respecting a corporation which holds only an interest in a partnership, whether the shares of such corporation can qualify as qualified small business corporation shares, the Directorate indicated that (as stated in the summary) where

a corporation has a partnership interest as one of its assets, it is the underlying partnership's assets (to the extent of the corporation's interest therein) that are used in determining whether all or substantially all of the corporation's assets are used in an active business for the purpose of the definition of small business corporation under subsection 248(1) of the Act and for the purpose of the definition of QSBCS under subsection 110.6(1) of the Act. Provided that these assets are used in an active business carried on primarily in Canada by the partnership, they will qualify as being used by the partner in an active business carried on primarily in Canada by the corporation.

22 October 1996 T.I. 963031 (C.T.O. "SVC - Only Asset Interest in a Partnership")

"... It is still Revenue Canada's view that a Canadian-controlled private corporation whose only asset is an interest in a partnership, where or substantially all of the partnerships assets are used to carry on an active business in Canada, would be considered to be a small business corporation"

26 July 1995 External T.I. 5-951469 -

"Where a financing arrangement that is fundamental to the business operations requires certain security to be maintained and it is reasonable to conclude from the facts that the security is employed and at risk in the business, the security may be considered to be used in the business... . If there is no real expectation that the security will be resorted to, one could conclude that the security was not used in the business. In our view, the employment of marketable securities merely as collateral is not generally sufficient to enable it to be considered to be used in a business"

31 March 1995 External T.I. 5-950110 -

"... Although a mortgage is an asset whose existence may be relevant to the equity of a corporation, it is not generally an asset used in an active business, as the funds tied up in the mortgage are no longer available for the active business uses of the corporation. However, mortgages taken back by a developer in order to facilitate sales may initially appear to be assets used in an active business, but if such mortgages are retained for more than a short period, they appear to have become more in the nature of investments".

31 March 1995 External T.I. 5-950121 -

"It is our opinion that normally a full-service motel operation would be providing a sufficient level of services such that it would not be considered to constitute a business whose principal purpose is to derive income from property. With respect to the campsites for trailers and campers, we have previously taken the position with respect to a corporation having less than six full-time employees, operating a trailer court and offering no more than normal services such as grounds maintenance and snow removal, that it would be considered to be conducting a specified investment business"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business motel but not trailer campsite a non-property business 94

25 October 1994 External T.I. 5-942583 -

Under a co-ownership arrangement, each co-tenant has a right to occupy the property in respect of all its areas and neither party can point to a particular part which represents its share of all areas. Accordingly, where substantially all the value of a corporation's property is represented by its 50% co-tenancy interest in a building, and it uses over 50% of its proportionate interest in the building in an active business with the other co-tenant being at arm's length, the corporation will not qualify as a small business corporation if less than 50% of the building's total value is being used in an active business carried on by the corporation.

24 October 1994 External T.I. 5-942455 -

The policy that where a corporation has a partnership interest, it is the underlying partnership assets (to the extent of the corporation's interest therein) that are used in determining whether all or substantially all of the corporation's assets are used in an active business, applies even if another partner of the partnership is a public corporation.

21 July 1994 External T.I. 5-940500 -

Intercorporate accounts receivable arising as a result of the leasing of equipment and the provision of administrative services by one corporation to an associated corporation, in RC's view would probably not be used in the business of the first corporation because the receivables generally would remain outstanding for extended periods of time and apparently would be converted into intercorporate advances on a regular basis.

21 July 1994 External T.I. 5-940982 -

Re wether a corporation that provides management services to a related professional practice is carrying on a business.

4 February 1994 T.I. 932524 (C.T.O. "Small Business Corporation")

Assets used principally in the active business of a limited partnership will be considered to be used in an active business by the corporate general partner of the limited partnership to the extent of its interest therein.

In applying the look-through approach to a partnership interest, it is the fair market value of the proportionate interest in the assets of the partnership which is considered to be the fair market value of the assets of the corporate partner, rather than the fair market value of the partnership interest.

A partner's advance to a partnership is generally not an asset used in an active business unless the partner is in the business of advancing funds.

1993 A.P.F.F. Round Table, Q. 22

Assets which "are not directly used in the active business carried on by the corporation because of unfavourable market conditions could nevertheless be considered to be 'used principally' for the purpose of the definition of small business corporation, if it is clear that the discontinuance is only temporary and the company intends to use these assets in its business soon".

93 C.R. - Q. 45

Generally, loans to employees who are not shareholders of the corporation, to acquire shares, a house, or an automobile, will be considered to be assets used in the active business of the corporation. The same treatment generally will be accorded to loans to employees who are also shareholders of the corporation that are made under the same terms and conditions as loans made by the corporation to other employees.

11 May 1993 T.I. 930222

"As a general rule a business that involves the sale or leasing of goods is usually carried on in the country where the corporation is resident, unless the business (or a part of it) is conducted by a virtually autonomous branch operation outside of Canada. Where a corporation's business involves the rendering of services, that business is carried on in Canada only to the extent that services are rendered in Canada, necessitating an apportionment of net business income on a reasonable basis"

5 April 1993 T.I. (Tax Window, No. 30, p. 19, ¶2494)

Shares which a franchisee is required to purchase in the franchisor in order to provide security in respect of trade payables which it owes to the franchisor will be considered to be used in an active business.

9 February 1993 T.I. (Tax Window, No. 29, p. 3 ¶2436)

Mortgages taken back by a developer in order to facilitate sales may initially be assets used in an active business, but will become investments if retained for more than a short period.

Substantial amounts of cash and deposits in excess of those required for use of the business and that are retained on a permanent basis, will not be considered to be funds used in the business.

The only receivables considered to be assets used in an active business are trade accounts receivable that arise from sales in the course of the corporation's active business.

3 February 1993 T.I. (Tax Window, No. 28, p. 14, ¶2415)

In order for land to be considered to be used in an active business, it generally must be subjacent to any building or structure affixed to the land or immediately contiguous land used as a parking area, driveway, yard, garden or similar land that is necessary for the use of the building. However, where zoning restrictions require that a larger parcel of land be acquired, the entire parcel could be considered to be an active business asset.

Tax Professionals Mini Round Table - Vancouver - Q. 34 (March 1993 Access Letter, p. 113)

Notwithstanding the decision in Bills Investments Ltd. v.First Investors Corp. Ltd. (1990), 72 DLR (4th) 32 at 45, the fair market value of a building for purposes of the definition of small business corporation is its gross value.

13 March 1992 T.I. (Tax Window, No. 18, p. 16, ¶1805)

Where one of the assets of a corporation is a partnership interest, the corporation's proportionate share of the fair market value of the partnership assets will be considered for purposes of applying the requirement that 90% of the fair market value of the corporation's assets be used in an active business.

17 February 1992 T.I. 920014 (March 1993 Access Letter p. 86, ¶C248-127; Tax Window, No. 16, p. 18, ¶1753)

If more than 50% of an asset is used in an active business, the asset will be considered to be used principally in an active business.

Words and Phrases
principally

15 January 1992 T.I. (Tax Window, No. 15, p. 7, ¶1702)

Assets leased by a partnership for use in its active business will be considered to be used in an active business carried on by the corporate partner to the extent of the partner's interest in the partnership. However, for the partnership business to be carried on by the corporate partner, there must be no legal impediment to the corporation's involvement in the business as may be the case with the limited partnership interest.

30 November 1991 Round Table (4M0462), Q. 11.6 - Eligible Assets (Receivable Dividend Refund) (C.T.O. September 1994)

A dividend refund amount receivable by a corporation constitutes an eligible asset.

30 November 1991 Round Table (4M0462), Q. 11.5 - Small Business Corporation (Purchase and Sale of Vacant Land) (C.T.O. September 1994)

A corporation in the business of buying and selling vacant land generally will qualify as a small business corporation as long as the vacant land is used in an active business carried on by it. An adventure in the nature of trade does not necessarily constitute the carrying on of an active business. It does not necessarily mean that the corporation has not carried on its business during the year in question if it had no activities and had no movements in its inventories in the year.

30 November 1991 Round Table (4M0462), Q. 11.4 - Small Business (Term Deposit) (C.T.O. September 1994)

Where a corporation's fees under service contracts are paid in advance and such funds are invested in term deposits, the term deposits could be considered to be used in its business if they satisfy RC's general requirement that the assets be really used and risked in the business, and if they have been so invested in anticipation of a possible repayment of the fees paid in advance.

16 September 1991 TI (Tax Window, No. 9, p. 9, ¶1451)

An unsecured non-interest bearing loan with no specific terms of repayment would qualify under the concept of "indebtedness" introduced by S.C. 1991, c. 49.

8 May 1991 T.I. (Tax Window, No. 3, p. 32, ¶1248)

Where a corporation earns interest income from cyclical cash and short-term investments and the interest is included in its active business income, then depending on the circumstances those assets would be considered to be used in an active business.

25 and 28 March 1991 T.I. (Tax Window, No. 1, p. 5, ¶1178)

Where the only assets of Holdco are shares of its wholly-owned subsidiary which carries on an active business in Canada and more than 10% of whose property is represented by an intercompany debt owing by Holdco, Holdco will not qualify as a small business corporation because more than 10% of the subsidiary's assets are represented by the debt of a corporation (Holdco) which is not connected to it.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 186 - Subsection 186(4) 9

23 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 24, ¶1103)

Where a corporation sells its business for cash, it has ceased to carry on an active business as of the date of the sale even if the cash proceeds are held for the purpose of acquiring another business similar to the one sold and the company is actively seeking out acquisition opportunities.

5 June 1990 T.I. (November 1990 Access Letter, ¶1536)

Where a corporation sells land and building used in a division of its active business and takes back a mortgage from the purchaser, the mortgage will not be used in an active business.

5 June 1990 T.I. (November 1990 Access Letter, ¶1527)

Where Opco and Realco are connected CCPCs and the real estate assets of Realco are leased to Opco, the shares of Realco and of Opco will constitute qualified small business corporation shares regardless whether the real property owned by Realco is financed by a mortgage from third parties, or by a non-interest bearing promissory note owing by it to Opco.

1 March 1990 T.I. (August 1990 Access Letter, ¶1391)

Where the proceeds of a life insurance policy held by a corporation on the life of its shareholder will be distributed by the corporation as a dividend or will be used to fund the acquisition of the shares of the deceased shareholder, such proceeds will not normally be considered to be used in an active business carried on by the corporation.

23 February 1990 T.I. (July 1990 Access Letter, ¶1347)

In the situation where a building was held in joint tenancy by an individual and a corporation owned by him, because no more than 50% of the building was used in the active business of the corporation no part of the value of the corporation's interest in the property would be a qualified use, notwithstanding that the corporation and the individual had a written agreement under which the corporation was entitled to the sole exclusive use and occupation of the portion of the property used in its business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence 82

12 September 89 Memorandum (February 1990 Access Letter, ¶1128)

Where an asset such as the building is only partly used in an active business carried on primarily in Canada by a corporation, it would appear to be most appropriate to require a pro-rating of the value of the asset for purposes of the asset use test in paragraph (a).

October 1989 Revenue Canada Round Table - Q.13 (Jan. 90 Access Letter, ¶1075)

The concept of connected corporations for purposes of the definition of "small business corporations" in s. 248(1) and the definition of "qualified small business corporation share" in s. 110.6(1) should be interpreted in the same fashion as under s. 186(4), i.e.,the fact that s. 186(2) begins with the words "for the purposes of this Part" does not preclude applying the same test to Part I or Part XVII.

October 1989 Revenue Canada Round Table - Q.24 (Jan. 90 Access Letter, ¶1075)

A debt of a parent corporation held by its subsidiary will not be a "bond, debenture, bill, note, mortgage, hypothec or similar obligation" if it is not constituted by a deed. RC has already adopted a hard line with regard to similar problems.

20 July 1989 T.I. (Dec. 89 Access Letter, ¶1066)

Where Mr. A and Mr. B conduct an active business through a partnership and Mr. A rolls his interest in the partnership into Holdco, which has no assets other than its interest in the partnership, then it is Holdco's proportionate share of the assets of the partnership that is used to determine whether Holdco is a small business corporation.

4 July 1989 T.I. (Dec. 89 Access Letter, ¶1051)

A corporation whose only assets are an interest in a limited partnership carrying on an active business and a loan to the partnership, qualifies.

88 C.R. - "Small Business Corporation Shares" - "Background": The "all or substantially all" test will normally be satisfied if assets (including unpurchased goodwill and underlying partnership assets) representing at least 90% of the fair market value of the assets of the corporation (including life insurance proceeds) are used in an active business carried on by it.

88 C.R. - F.Q.32

The fair market value of a life insurance policy valued in accordance with normal valuation practices and IT-416R3, para. 4 and 5, will be taken into account to determine whether a corporation is a small business corporation at the time of the deemed disposition referred to in paragraph 70(5)(a). The policy would not normally be considered to be an asset used in an active business carried on by the corporation where the life insurance proceeds are to be distributed by the corporation as a dividend or to fund a buy-sell agreement. [C.R.: 110.6(1) - "qualified small business corporation share"]

86 C.R. - Q.51

a CCPC whose only asset was an interest in a partnership substantially all of whose assets were used in a Canadian active business, would qualify. [C.R.: 96(1)(f)]

81 C.R. - Q.31

Since RC looks through a partnership interest to the underlying assets in applying the test, an interest in a partnership held by a corporate partner may qualify as an asset used in an active business. [C.R.: 96(1)(f)]

IT-486R "Intergenerational Transfers of Shares of a Small Business Corporation"

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