Principal Issues: Is a corporation's refundable dividend tax on hand an asset that is used principally in an active business carried on in Canada for purposes of the definition of "small business corporation" in subsection 248(1) of the Income Tax Act?
Position: No
Reasons: Previous position taken
CALU - Conference for Advanced Life Underwriting (2006)
Question 6
Small Business Corporation
In order for a corporation to qualify as a "small business corporation", as defined in subsection 248(1) it must satisfy an asset test. All or substantially all of the fair market value of the corporation's assets must be attributable to the types of assets listed in the definition.
Questions
(a) Is the amount of the corporation's refundable dividend tax on hand to be included as an asset for the purpose of this test?
(b) Does the CRA's response depend on whether the corporation has paid any taxable dividends in its taxation year that includes the time at which its status as a small business corporation is being tested?
Agency's Response
The question of whether a particular asset is an "asset used principally in an active business" is one of fact which must be determined based on all the relevant facts and circumstances of each case. The relevant circumstances include the actual use to which the property is put in the course of the business, the nature of the business and the practice in the particular business.
In determining whether a corporation is a small business corporation, the CRA does not take into consideration the portion of a corporation's refundable dividend tax on hand for which no dividend refund is made. Refundable dividend tax on hand is a notional account that is required to be calculated based on the applicable law in the Income Tax Act.
Generally, the CRA is of the opinion that a dividend refund receivable by a corporation as a result of paying taxable dividends to shareholders constitutes an eligible asset that is used by the corporation in a business.
Prepared by
Gwen Moore
(613) 729-2251
May 9, 2006