Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
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.
Principal Issues:
Is cash considered to be an asset used principally in an active business?
Position TAKEN:
The question is one of facts but there are some guidelines.
Reasons FOR POSITION TAKEN:
3-940119, 5-930033, 5-920191
5-940236
XXXXXXXXXX L. Roy
Attention: XXXXXXXXXX
April 12, 1994
Dear Sirs:
Subject: Subsection 110.6(1) of the Income Tax Act
This is in reply to your letter of January 28, 1994 in which you requested our opinion as to whether cash received as a result of a business related lawsuit and held for a few days would be considered to be an asset used principally in an active business for the purposes of the definition of "qualified small business corporation share" set out in subsection 110.6(1) of the Income Tax Act.
All references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended consolidated to June 10, 1993 (the "Act").
The situation described in your letter appears to involve actual proposed transactions with identifiable taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990. Where the particular transactions are completed, the enquiry should be addressed to the relevant district taxation office. Nevertheless, we offer our general views as to when cash or near cash property held by a corporation will be considered to be used in the course of an active business. We stress that the following guidelines are necessarily of a general nature and that the Department will make its determination on a case by case basis.
1.The question of whether a particular asset is an "asset used principally in an active business" is one of fact which must be determined based on all the relevant facts and circumstances of each case. The relevant circumstances 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 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.
5.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.
6.Cash or near cash property is considered to be used principally in the business if its retention fulfils a requirement which had to be met in order to do business, such as certificates of deposits required to be maintained by a supplier.
7.The Department recognizes that prudent financial management requires businesses to maintain current assets (including inventories and accounts receivables, 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 the Department's 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 trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
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