Canada Revenue Taxation Head Office
XXX
A.A. Cameron (613) 957-2116
July 5 1988
Dear Sirs:
Re: Small Business Corporation ("SBC") as defined for the purposes of the Income Tax Act (the "Act")
We are writing in response to your letter of March 14, 1988 in which you requested our views on whether intangible assets of a Canadian-controlled private corporation (a "CCPC") are to be considered when determining if "all or substantially all" of its assets are used in an active business for purposes of the above-mentioned SBC definition.
You have stated that there are many instances where intangible assets are not recognized on a corporation's balance sheet simply because they have arisen since the inception of the business. For example, generally accepted accounting principles do no allow for the recognition of goodwill or other intangibles that have not been purchased. You have also indicated that this does not mean that they do not exist if the business were being valued by a third party and in particular in the case of service businesses the tangible assets are often negligible relative to the total value of the business when one considers the client base, the team of employees and other intangibles that exist in such a business.
In your view any business, regardless of its nature, should be valued as a whole and all of the assets, whether "on the books" or not, should be considered in determining whether "all or substantially all" of the assets are used in an active business. You have also requested our views as to whether a particular valuation method is acceptable in placing a value on intangible assets.
The determination of whether a particular CCPC qualifies as a SBC is made as "at any particular time" and in our opinion when making this determination one must consider all of the assets of that corporation at that time whether tangible or intangible. To meet the requirements of paragraph (a) of the definition of a SBC, as contained in subsection 248(1) of the Act, "all or substantially all" of these assets must be "used in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it". Whether or not a particular asset, including an intangible asset, is so "used" is a question of fact which must be determined based upon all the relevant facts of a particular situation.
It should be noted that the Notice of Ways and Means Motion to amend the Income Tax Act which was tabled in the House of Commons on June 13, 1988 proposes to amend the SBC definition contained in subsection 248(1) of the Act to specify that the "all or substantially all" test referred to above is to be measured in terms of the "fair market value" of the assets of the particular CCPC.
We are unable to respond to questions involving valuation matters. You may wish to address your questions in that regard to the Valuations Section of the London District Office.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch