October 1, 1986
Current Amendments and Regulations Division
HEAD OFFICE Leasing and Financing Section L. Cardinal-Healy Tel.: 957-2747
Mr. B. Bryson A/Director
Venture Capital Corporations Tax Treatment of Administrative Expenses
This is in response to your memorandum of July 10, 1986 wherein you requested our opinion concerning the tax treatment of administrative expenses incurred by ven- ture capital corporations (VCC). You are concerned whether administrative expen- ses should be deductible in computing income where an election has been made under subsection 39(4) of the Art to have the VCC's holdings that are Canadian securities treated as capital property.
The fact that an election under subsection 39(4) is made would not preclude the deduction of administration expenses incurred in carrying on a VCC's normal business activities. If the VCC's sole source of income is derived from the disposition of securities and an election under subsection 39(4) is made, the administrative expenses should remain deductible notwithstanding subsection 9(3). Under suhsection 9(3), income from property does not include capital gains. However, the deeming provision of subsection 39(4) should not change the basic business and source of income of a VCC. Therefore, the administrative expenses should remain deductible in computing their income.
In addition, it is our understanding that it is not Finance's intention to restrict the deductibility of expenses incurred by VCC's in the course of their business operations.
Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch