| 19(1) | File No. 5-9330 |
| M. Eisner | |
| (613) 957-2138 |
February 20, 1990
Dear Sirs:
This is in reply to your letter of December 19, 1989 concerning whether certain assets may be considered to have been used in an active business for the purposes of the definition of "small business corporation" in subsection 248(1) of the Income Tax Act.
You have provided us with the following hypothetical situation:
1. A Co. carries on an active business which has traditionally been and continues to be highly profitable.
2. A Co. does not engage in any activities which are not related to that business.
3. Each year, the company pays a bonus to its shareholder/manager equal to the amount by which its net income for income tax purposes exceeds $200,000. The bonus is normally declared just prior to the company's fiscal year end and is paid early in the next fiscal year.
4. The bonus is paid as remuneration in respect of the services performed by the shareholder in managing the company's business.
5. During the course of its fiscal year, A Co. accumulates cash and often invests it in short-term investments such as term deposits. The funds are then used in the next fiscal year to pay the bonus which has been accrued.
You mention that the accumulated funds represent part of A Co.'s normal working capital which is required to pay a regularly occurring expense that is related to the company's active business. Accordingly, it is your view that those assets constitute "assets used in an active business" for the purpose of determining whether A Co. is a small business corporation pursuant to the definition of this term in subsection 248(1) of the Act.
Our Comments
Where cash, which is temporarily surplus to the needs of a business, is invested in short-term income producing investments, it is our general view that these accumulated funds may be considered to be used in the business. Where, on the other hand, cash and short-term investments, which are clearly in excess of that required for use in the business, are retained in the corporation on a permanent basis, they would not be considered to be funds used in the business. Rather, such funds would be considered as permanently set aside for investment or non-qualified uses (i.e. uses other than in an 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.
To the extent that your hypothetical facts are consistent with our comments (i.e., the extent that the accumulated funds are used to pay the bonus), we concur with your stated opinion.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and, accordingly, it is not binding on Revenue Canada, Taxation.
We trust you will find the foregoing satisfactory.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch