9 April 1996 Ruling 9606993 - ACTIVE BUSINESS, COMMENCEMENT

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.

									960699
XXXXXXXXXX							M.P. Sarazin

Attention: XXXXXXXXXX

April 9, 1996

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated February 19, 1996, wherein you requested an advance income tax ruling that the shares of the above-noted corporation would be qualified investments for a registered retirement savings plan ("RRSP"). In our telephone conversation of March 13, 1996 (XXXXXXXXXX/Duff), you were advised that your ruling request involves a determination of fact as described in subparagraph 14(j) of Information Circular 70-6R2 and, as a consequence thereof, we are not able to provide you with the requested advance income tax ruling. Accordingly, your deposit will be refunded under separate cover. However, although we are not able to rule on this matter, we will provide you with the following general comments.

Comments

Shares of a Canadian-controlled private corporation may be a qualified investment, within the meaning of subsection 146(1) of the Income Tax Act (the "Act"), for an RRSP where the corporation is an "eligible corporation" and the annuitant of the RRSP is not a "designated shareholder" of the company. These latter two terms are defined terms and their meanings are provided in sections 4900 through 5103 of the Income Tax Regulations (the "Regulations").

In brief, an "eligible corporation" is generally a taxable Canadian corporation which uses substantially all (90% or more) of its property in a "qualifying active business". Specifically excluded from this definition are securities dealers, financial institutions, corporations whose principal business is the lending of money or the purchasing of debt, and non-resident controlled corporations.

A "qualifying active business" is also a defined term which generally includes any business which is carried on in Canada except one where the principal purpose is to earn income from property in the form of interest, dividends, rent, royalties or gains from dispositions of property. A qualifying business may, however, include a business of leasing property other than real property, and a retail or wholesale business.

Whether or not a business is being carried on at any particular time is a question of fact. In Interpretation Bulletin IT-364, the Department provides general guidelines with respect to the commencement of a business. In a situation where:

(a) the type of activity to be carried on by a corporation is known and a sufficient organizational structure is assembled to undertake at least the essential preliminaries;

(b) market surveys have been undertaken on a reasonably extensive basis for the purpose of establishing the most appropriate way or place to carry on the business;

(c) studies and representations have been made to regulatory authorities in order to obtain the required licenses; and

(d) preliminary arrangements have been negotiated with respect to the premises required to operate the business,

we would generally conclude, based upon the comments in paragraph 2 to 5 of IT-364, that the business would have commenced for the purpose of determining whether or not a corporation is carrying on a qualifying active business.

A "designated shareholder" of a corporation is any RRSP annuitant who

(a) is, or is related to,

(i) a "specified shareholder" (generally, a person who directly or indirectly holds 10% or more of the shares of any class of shares of the corporation), or

(ii) a person who would be a "specified shareholder" if he or she were deemed to own all the shares which he or she has a right to acquire under a contract, in equity or otherwise, either immediately or in future and either absolutely or contingently, and one of the main reasons for the existence of the right may reasonably be considered to be that he or she not be regarded as a "specified shareholder",

unless the cost amount of those shares (i.e. the shares owned directly or indirectly by the RRSP annuitant or the related person, and the shares the RRSP annuitant or related person has a right to acquire) is, in total, less than $25,000. For this purpose, an annuitant of an RRSP is deemed to own the shares owned by the RRSP (see definition of "specified shareholder" in subsection 248(1) of the Act);

(b) is or is related to a member of a partnership that controls the corporation in any manner;

(c) is or is related to a beneficiary under a trust that controls the corporation in any manner;

(d) is or is related an employee of the corporation where the employee controls the corporation, except where the corporation is controlled by one person or a related group of persons; or

(e) does not deal at arm's length with the corporation.

Subsection 4900(12) of the Regulations (applicable after December 2, 1992) was introduced to allow a share of the capital stock of a "small business corporation" to be a qualified investment for an RRSP, provided that the RRSP annuitant is not a "connected shareholder" of the corporation immediately after the acquisition of the share. The corporation must be a "small business corporation" at the time the share is acquired by the RRSP or at the end of the taxation year of the corporation ending before the time the share is acquired.

For this purpose, a "small business corporation" is a Canadian corporation that is not directly or indirectly controlled by one or more non-residents. In addition, to qualify as a "small business corporation" all or substantially all (90% or more) of the fair market value of the corporation's assets must be attributable to assets that were:

(a) used principally (50% of the time or more) in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,

(b) shares or indebtedness of other small business corporations which were connected with the particular corporation, or

(c) assets described in a and b above.

A "connected shareholder" of a corporation is a "specified shareholder" as defined in subsection 248(1) of the Act - generally, this means a person who owns, or who is a member of a related group which owns, directly or indirectly, 10% or more of the issued shares of any class of the corporation. For this purpose, an annuitant of an RRSP is deemed to own the shares owned by the RRSP (see definition of "specified shareholder" in subsection 248(1) of the Act). A "connected shareholder" also includes a person who would be a "specified shareholder" if each person or partnership which has an option to acquire a share owned the share.

On November 29, 1994, the Department of Finance issued a News Release announcing draft amendments to the Income Tax Regulations on qualified investments for RRSP's. Pursuant to the proposed amendments, a person will not be considered

to be a "connected shareholder" of a corporation if the cost of shares in the corporation to that person and related persons is less than $25,000 and the person deals at arm's length with the corporation. The amendment to the connected shareholder's definition will be applicable with respect to property acquired December 2, 1992.

Due to the detail and complexity of the Regulations regarding these issues, the foregoing comments are meant only to provide an overview of the relevant provisions and under no circumstances should they be considered either comprehensive or all inclusive.

The above comments are an expression of opinion only and do not bind the Department. We trust, however, that they will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch