A corporation in its start-up phase has used a portion of the funds raised to date to cover specific business expenses. Would the remainder of those funds held by it as cash be considered to be used principally in an active business, as required under the “specified business corporation” definition in Reg. 4901(2), such that its shares would be qualified investments for an RRSP under Reg. 4900(14)(a)(i)?
After noting that in order for the funds to so qualify, it would be necessary to first determine that business operations had in fact commenced, CRA provided guidelines (which were “necessarily of a general nature”) on the test of use principally in an active business, including the following:
- Cash or near cash property is considered to be used principally in the business if its withdrawal would destabilize the business.
- Cash which is temporarily surplus to the needs of the business and which is invested in short-term income producing investments may be considered to be used in the business.
- Cash balances which accumulate and are then depleted in accordance with the annual seasonal fluctuations of an ongoing business will generally be considered to be used in the business, but a permanent balance in excess of the company's reasonable working capital needs will generally not be considered to be so used.
- The accumulation of funds in anticipation of the replacement or purchase of capital assets or the repayment of a long-term debt will not generally in itself qualify the funds as being used in the business.
- [C]ash and near cash assets held to offset the non-current portion of long term liabilities will not generally be considered to be used in the business.