Surplus Cash And The Active Asset Test: Lessons From Ehresman

Key Takeaways

• No inference of intent: Courts rejected the claim that surplus cash was earmarked for decommissioning in the absence of contemporaneous reserves, allocations, or disclosures.
• Rational connection required: A reserve must be tied to a reasonably determined risk and quantified amount, not a vague future liability.
• Inaction is evident: silence in financial statements, a lack of allocation across business lines, and the absence of expert support outweigh post-sale explanations.

The Situation

Ken and Marianne Ehresman sold all shares of C.C.M. Resources Ltd., seeking to claim the lifetime capital gains exemption (LCGE). CRA denied the claim, asserting that CCM's surplus cash and investments weren't used in an active business. At the time of sale, CCM operated oil wells and a financial services business. The Ehresmans argued that large cash reserves were held to fund the inevitable decommissioning of the oil wells, an obligation that would