5-903676
Dear Sirs:
Re: Qualification as a Small Business Corporation
This is in reply to your letter of December 15, 1990 concerning the qualification of a corporation as a small business corporation as defined in subsection 248(1) of the Income Tax Act (the "Act").
You describe a situation where a corporation operated a business and in your opinion qualified as a small business corporation, as defined in subsection 248(1) of the Act, until May 15, 1989 at which time it sold the business by way of an asset sale. The corporation intended to purchase another like business and for this purpose borrowed funds from an affiliated company. The cash balance and related payable to the affiliated company plus amounts due to the shareholders essentially comprised the balance sheet of the corporation since May 15 1989. The company has actively pursued the purchase of a like business but to date has not been successful in its efforts. It now intends to return the funds to the affiliated company and wait for market conditions to improve. The only income earned by the corporation since May 15, 1989 has been the interest on the borrowed funds held in order to purchase another like business.
You request our views as to whether the compilation of funds to purchase a business in the situation described above would preclude the corporation from qualifying as a small business corporation. If the corporation does not qualify as a small business corporation you requested our views as to the date it ceased to so qualify.
Our Views
The definition of small business corporation in subsection 248(1) of the Act refers to assets used in an active business. Active business is defined in subsection 248(1) of the Act to mean any business carried on by the taxpayer other than a specified investment business or a personal services business.
Since the sale on May 15, 1989 of the business by way of an asset sale the corporation does not appear to be carrying on an active business. Neither efforts to purchase a business, nor the earning of interest income would be considered an active business carried on by the corporation. From the limited information at hand the corporation would appear to fit the description of a specified investment business in paragraph 125(7)(e) of the Act. Therefore in our view the corporation would not qualify as a small business corporation from at least May 15, 1989. Whether or not the corporation qualified prior to May 15, 1989 is a question of fact to be determined on the basis of the specific details and facts in the case.
We trust this will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings Directorate