28 April 1993 Income Tax Severed Letter 930033 - Cash—Used Principally in Active Business

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                             930033
XXXXXXXXXX                                   W.P. Guglich
                                             (613) 957-2102

Attention: XXXXXXXXXX

April 28, 1993

Dear Sirs:

Re: Cash & Term Deposits Used Principally in an Active Business

This is in reply to your letter of December 24, 1992 in which you requested our opinion whether accumulated cash which is invested in term deposits to acquire land and a building to house the company's manufacturing operations would be considered to be "assets used principally in an active business" for purposes of the definition of qualifying small business corporation share in subsection 110.6(1) of the Income Tax Act.

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

1.        The question is one of fact which must be
          determined based on all the relevant facts and
          circumstances of each case.  The relevant
          circumstances will include the actual use to which
          the cash or near cash properties are put in the
          course of the business, the nature of the business
          and the practice in the particular business.

2.        Cash or near cash property is considered to be used
          principally in the business if its withdrawal would
          destabilize the business.

3.        Cash which is temporarily surplus to the needs of
          the business and is invested in short-term income
          producing investments could be considered to be
          used in the business.

4.        Cash or near cash which is surplus to the needs of
          the business over the long term would not generally
          be considered to be used in the business. 

5.        Accumulation of funds in anticipation of the
          replacement or purchase of capital assets may not
          necessarily in itself qualify the funds as being
          used in the business.

6.        Question 54 and question 18 respectively, of the
          1992 and 1990 Canadian Tax Foundation—Revenue
          Canada Roundtables did not deal with accumulated
          cash or near cash property.  In fact question 54 of
          the 1992 Roundtable refers to question 18 of the
          1990 Roundtable which contemplated the situation
          where land is acquired and a building is
          constructed and this new facility is used in the
          active business within a reasonable period of time
          after completion and not for any other purpose. 

We trust our comments will be of assistance to you.

Yours truly,

R. Albert for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch