2017-0717561E5 specified small business corporation

Principal Issues: Whether a particular corporation would be considered to be a “specified small business corporation” as defined in subsection 4901(2) of the Income Tax Regulations (“Regulations”) such that its shares would be qualified investments for an RRSP in accordance with subparagraph 4900(14)(a)(i) of the Regulations?

Position: Question of fact. General views provided to assist in determination.

Reasons: Question of fact.

Author: Doiron, Wayne
Section: 248(1) "active business", Reg 4901(2), Reg 4900(14), Reg 4900(15)

XXXXXXXXXX                                                                                             2017-071756
                                                                                                                     W. Doiron
January 25, 2018

Dear XXXXXXXXXX:

Re: RRSP investment in specified small business corporation

This is in reply to your email of August 4, 2017 regarding the small business investment rules for registered retirement savings plans (“RRSPs”). Specifically, you inquire whether a particular corporation would be considered to be a “specified small business corporation” as defined in subsection 4901(2) of the Income Tax Regulations (“Regulations”) such that its shares would be qualified investments for an RRSP in accordance with subparagraph 4900(14)(a)(i) of the Regulations.

You note that the corporation is in its start-up phase and is in the process of raising the necessary funds to finance the future construction of its business facilities. While the corporation has used a portion of the funds raised to date to cover specific business expenses, you are concerned that the remainder of those funds which are held by the corporation as cash may not be considered to be used principally in an active business. If so, the corporation would not meet one of the conditions to be a specified small business corporation and therefore would be unable to raise funds from RRSPs.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

As explained in ¶1.57 of Income Tax Folio S3-F10-C1, Qualified Investments - RRSPs, RESPs, RRIFs, RDSPs and TFSAs, a “specified small business corporation” is a Canadian corporation (as defined in subsection 89(1) of the Act but not including a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons) all or substantially all of the fair market value of the assets of which is attributable to assets that are:

*     used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it;

*     shares or debt of connected small business corporations; or

*     a combination of the above two.

To qualify as a specified small business corporation at a particular time, a corporation must satisfy these conditions either at that time or at the end of the corporation's preceding tax year. Active business is defined in subsection 248(1) of the Act as any business that is carried on by a taxpayer resident in Canada other than a specified investment business or a personal services business. For more information, see Interpretation Bulletin IT-73R6, The Small Business Deduction.

The situation you describe involves the accumulation of funds for a new business and whether those funds would be considered to be used in an active business. Before considering this issue, it is first necessary to determine that business operations have in fact commenced. This is a question of fact that can only be determined after reviewing all of the relevant facts. The CRA’s general comments regarding commencement of business operations are found in Interpretation Bulletin IT-364, Commencement of Business Operations.

The second issue involved in your enquiry concerns whether the remaining funds held as cash or near cash property by the corporation would be considered to be assets used principally in an active business.  For your guidance, the CRA’s general views on this question are as follows:

*     Whether a particular asset is used principally in an active business is a question of fact which must be determined with reference to the circumstances of the case under review. The relevant circumstances include the actual use to which the cash is put in the course of the business, the nature of the business and the practice in the particular business.

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

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

*     Cash balances which accumulate and are then depleted in accordance with the annual seasonal fluctuations of an ongoing business will generally be considered to be used in the business, but a permanent balance in excess of the company's reasonable working capital needs will generally not be considered to be so used.

*     The accumulation of funds in anticipation of the replacement or purchase of capital assets or the repayment of a long-term debt will not generally in itself qualify the funds as being used in the business.

*     Cash or near cash property is considered to be used principally in the business if its retention fulfills a requirement which had to be met in order to do business, such as certificates of deposits required to be maintained by a supplier.

*     We recognize that prudent financial management requires businesses to maintain current assets (including inventories and accounts receivable, as well as cash and near cash properties) in excess of current liabilities and will consider this requirement in assessing whether cash or near cash assets are used principally in a business. In our view, cash and near cash assets held to offset the non-current portion of long term liabilities will not generally be considered to be used in the business.

We stress that the above information is necessarily of a general nature and the CRA would make its determination after a review of all the relevant facts and circumstances, including the actual use to which the cash or near cash property was put in the course of the business, the nature of the business involved and the practice in the particular industry.

We trust our comments will be of assistance.

Yours truly,

Dave Wurtele
Acting Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018