| 19(1) | File No. 5-9008 |
| G. Thornley | |
| (613) 957-2101 |
January 18, 1990
Dear Sirs:
Re: Definition of Small Business Corporation
This is in reply to your letter of October 30, 1989 requesting our interpretation of whether a particular corporation meets the definition of a SBC as defined in 248(1) of the Income Tax Act (the "Act").
Whether or not a specific corporation is a SBC at a particular time is a question of fact the determination of which cannot be made without a thorough examination of all the relevant facts and a review of its day to day activities. Such examinations are usually carried out by officers from a District Taxation Office. We do however provide the following comments.
Our Comments
The definition of a SBC in subsection 248(1) of the Income Tax Act includes the words "assets that were used in an active business..." Part of the definition of an active business in paragraph 125(7)(a) of the Act reads "active business carried on by a corporation mean any business...other that a specified investment business...". A specified investment business is, in essence, a business the principal purpose of which is to derive its income from property and it would, were it not for one of the exceptions set out in paragraph 125(7)(e), probably be considered to be a "specified investment business". However, such a business is considered to be an active business rather than a specified investment business where the corporation employs in the business throughout the taxation year more than five full-time employees.
Once having determined that a particular business is an "active business" it is then necessary to examine the assets used in that business to see if the corporation meets the test set out in the SBC definition that "all or substantially all of the fair market value of the assets...were (a) used in an "active business". Whether certain assets are used in an active business is also a question of fact. In order to make such a determination, it is necessary to have knowledge of all the facts surrounding a particular case. This can best be done, as indicated earlier, by staff of a District Taxation Office.
It is our view, however, that where for instance cash that is temporarily surplus to the needs of a business is invested in short-term income producing investments, those investments may be considered to be used in the business. Where on the other hand substantial amounts of cash and deposits which are obviously in excess of that required for use in the business are retained in the corporation on a permanent basis, they would not be considered as permanently set aside for investment or non-qualified uses (i.e. uses other that in active business). This position is stated in paragraph 8 of IT-73R4 and is consistent with similar comments in paragraph 29 of IT-268R3 and paragraph 5 of IT-486R.
Similar observations can be made with respect to marketable securities, notes receivable, and investment portfolios. On the assumption, however, that all of the assets described in your facts are in fact being used in the multi-faceted financial service business it would appear to qualify as a S.B.C. as defined in subsection 248(1).
We stress that the above expressions of opinion are not rulings and are not binding upon Revenue Canada, Taxation as explained in paragraph 24 of Information Circular 70-6R. In this respect if you are contemplating a proposed transaction you may wish to apply for an advance income tax ruling in accordance with the instruction in the above noted Information Circular.
Yours truly,
E.M. Wheelerfor DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch