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:
Whether a labour sponsored investment fund corporation (a type of venture capital corporation) could be caught by 39(5)(f) and therefore not qualify as an "eligible corporation" because of 5100(1)(c). If it's not an eligible corporation, its shares are not qualified investments for RRSP's etc. and its shares cannot be used to bump the amount of foreign property not subject to Part XI tax.
Position TAKEN:
Yes.
Reasons FOR POSITION TAKEN:
The statute regulating labour sponsored investment fund corporations permits such a corporation to have as its business the assistance of the development of eligible businesses etc. by purchasing shares and debt obligations. Therefore, its principal business could be the purchase of debt obligations.
XXXXXXXXXX 942904
Attention: XXXXXXXXXX
December 16, 1994
Dear Sirs:
Re: Labour Sponsored Investment Fund Corporation (LSIFC)
This is in reply to your facsimile transmission of November 11, 1994, in which you ask whether we consider an LSIFC to be a corporation, as described in paragraph 39(5)(f) of the Income Tax Act (the "Act"), the principal business of which is the purchasing of debt obligations.
Such a corporation may not elect under subsection 39(4) of the Act to deem its dispositions of Canadian securities to be on capital account.
Additionally, an LSIFC is a venture capital corporation prescribed under section 6700 of the Income Tax Regulations (the "Regulations") and, therefore, is an "eligible corporation" as defined in paragraph (b) of the definition contained in subsection 5100(1) of the Regulations unless it is a corporation described in subsection 39(5) of the Act.
If an LSIFC is not an "eligible corporation", then its shares will not be qualified investments under subsection 4900(6) of the Regulations. A share of an LSIFC which is not a qualified investment will not be a "small business property" under paragraph (a) of the definition contained in subsection 206(1) of the Act, and therefore its value will not be able to be used under subparagraph 206(2)(c)(i) to increase the amount of foreign property exempt from Part XI tax which can be held in certain deferred income plans.
According to the Labour Sponsored Venture Capital Corporations Act, 1992 (S.O. 1992, c. 18 - the "Ontario Act") a labour sponsored investment fund corporation must have as its business:
I.assisting the development of eligible businesses, creating, maintaining and protecting jobs
a)by providing financial and managerial advice to eligible businesses
b)and by providing capital to eligible businesses through the acquisition and holding of shares and qualifying debt obligations (defined as a debt obligation that, if secured, is secured solely by a floating charge or a debt obligation in respect of which a guarantee has been given) issued by eligible businesses that are corporations and (through) ownership interests of and qualifying debt obligations issued by eligible businesses that are Canadian partnerships
II.incorporating and controlling such other corporations to provide services to the corporation in connection with the distribution of the corporation's shares or to provide financial, investment or managerial advice and expertise.
The method described in I. b) (the acquisition and holding of qualifying debt obligations) is an activity to be used in pursuit of the main business activity of assisting the development of businesses and creating jobs. The issue is whether this method is the "principal business" of a venture capital corporation. Several other provisions in the Ontario Act regulate the minimum and maximum amount of holdings in certain investments and assets which will affect our conclusion on this matter.
Subsection 18(1) of the Ontario Act states that an investment for an LSIFC is an eligible investment if, among other things, it is a purchase of a qualifying debt obligation for money. An eligible investment also includes the purchase of shares of certain corporations or ownership interests of certain Canadian partnerships. An eligible investment in a particular corporation or partnership must not constitute more than 10% of the LSIFC's then issued and outstanding equity capital and the LSIFC must not control any particular corporation or partnership in which it invests.
Subsection 17(1) of the Ontario Act requires that by the end of twenty four months after the end of the fiscal year in which the LSIFC issued a Class A share, the LSIFC must hold at least 70% of its Class A share equity in eligible investments.
Subsection 19(1) of the Ontario Act requires that the LSIFC's assets be maintained in one or more certain forms including eligible investments and "reserves"; the latter term is defined to mean property described in (then) subparagraph 204(e)(i), (ii), (iii), (vii) and (viii) of the Act (now paragraphs (a), (b), (c), (f) and (g) of the section 204 definition of qualified investments), deposits in or guaranteed investment certificates issued by Ontario's Savings Office and prescribed investments (we are not aware of any existing regulations under the Ontario Act prescribing such investments).
Within the limits imposed by the Ontario Act it would be possible for a corporation to meet the requirements of an LSIFC and not have as its principal business the purchase of debt obligations. For example, an LSIFC can restrict its business to the purposes set out in I and II above but narrow its methods in I a) and b) to the purchase of shares and ownership interests or to such purchases and to the incidental purchase of debt obligations. The incidental nature of the purchase of debt obligations could be achieved by limiting it to a certain percentage of the LSIFC's equity/assets/investments or ensuring a higher proportion of equity purchases as opposed to debt purchases.
You also asked specifically whether a 100% investment in the "reserves" (qualified investments) described in section 204 of the Act within the first 24 month period after the issue of its first Class A share would result in the LSIFC having as its principal business the purchase of debt obligations. Certain of the qualified investments described in section 204 in which LSIFC's can invest are not "debt obligations" (e.g., money that is legal tender in Canada, deposits of such money, GIC's and investment contracts) so again it would be possible for an LSIFC to ensure that the greater part of its investments during its start-up period were invested in non-debt instruments.
To the extent that an LSIFC did not restrict its activities principally to the purchase of shares and ownership interests nor restricted its investments to such purchases and to non-debt "reserves", we are of the view that it could be considered a corporation described in paragraph 39(5)(f) of the Act with the attendant consequences for the qualified investment and foreign property rules.
Although the foregoing comments are not binding on the Department, we trust they satisfactorily explain our interpretation.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
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