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 paragraph (d) of the definition of "qualified small business corporation share", which requires that the reference in clause (c)(ii)(B) of the definition to 50% be read as 90%, only applies where, during any part of the 24-month period, a parent corporation cannot meet the 50% asset test in paragraph (c) without relying upon the shares and/or indebtedness it holds in a subsidiary corporation.
Position:
Paragraph (d) of the definition will apply during any part of the 24-month period during which the parent corporation does not meet the 90% asset test, although the application of the 90% asset test in respect of the subsidiaries will be of no consequence if the parent corporation meets the 50% asset test of paragraph (c) by reference only to its own active business assets.
Reasons:
Where a corporation is part of a vertical chain and less than 90% of the fair market value of the assets of that corporation or any corporation connected thereto (within the meaning of paragraph (d) of the definition of "qualified small business corporation share") is, for any particular period of time in the 24-month period ending at the determination time, attributable to assets described in subparagraph (c)(i) or (c)(ii) or any combination thereof, for purposes of paragraph (c) of the definition of "qualified small business corporation share", the reference in clause (c)(ii)(B) to 50% must, for the particular period of time, be read as 90%.
5-961002
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
June 25, 1996
Dear XXXXXXXXXX
Re: Qualified Small Business Corporation Shares - Subsection 110.6(1) of the Income Tax Act
We are writing in reply to your letter of March 11, 1996, wherein you requested our comments regarding the application of paragraph (d) of the definition of "qualified small business corporation shares" in subsection 110.6(1) of the Income Tax Act (the "Act") in the two following situations:
1)For the first 6 months of the 24-month period, the fair market value of the assets of Parentco 1 is comprised of non-qualifying assets (32%), indebtedness of subsidiary 1 (4%), shares of subsidiary 1 (8%) and active business assets (56%). The assets of subsidiary 1 during the same period comprise non-qualifying assets (13%) and active business assets (87%). During the remaining 18 months, the fair market value of the assets of Parentco 1 is comprised of indebtedness of subsidiary 1 (40%), shares of subsidiary 1 (12%) and active business assets (48%), while the assets of subsidiary 1 include non-qualifying assets (15%) and active business assets (85%).
2)For the first 6 months of the 24-month period, the fair market value of the assets of Parentco 2 is comprised of non-qualifying assets (32%), indebtedness of subsidiary 2 (4%), shares of subsidiary 2 (8%) and active business assets (56%). The assets of subsidiary 2 during the same period comprise non-qualifying assets (73%) and active business assets (27%). During the remaining 18 months, the fair market value of the assets of Parentco 2 is comprised of indebtedness of subsidiary 2 (40%), shares of subsidiary 2 (12%) and active business assets (48%), while the assets of subsidiary 2 include non-qualifying assets (15%) and active business assets (85%).
In addition, you indicate that, at the determination time, subsidiaries 1 and 2 will not have any non-qualifying assets.
You inquire whether in the above two situations, paragraph (d) of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Act would apply in respect of the shares of the Parentcos. In your view, since paragraph (d) of the definition of "qualified small business corporation share" only applies during the part of the 24-month period when the Parentcos do not meet the 50% asset test without relying upon the indebtedness or shares they hold in their respective subsidiaries, neither the Parentcos nor their subsidiaries are required to meet the 90% asset test throughout the entire 24-month period.
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. The following comments are, therefore, of a general nature only, and are not binding on the Department.
Where a corporation is part of a vertical chain and less than 90% of the fair market value of the assets of that corporation or any corporation connected thereto (within the meaning of paragraph (d) of the definition of "qualified small business corporation share") is, for any particular period of time in the 24-month period ending at the determination time, attributable to assets described in subparagraph (c)(i) or (c)(ii) or any combination thereof, for purposes of paragraph (c) of the definition of "qualified small business corporation share", the reference in clause (c)(ii)(B) to 50% must, for the particular period of time, be read as 90%.
Therefore, in the two situations described above, the 90% asset test of paragraph (d) of the definition of "qualified small business corporation share" would apply to the subsidiaries for the first 6 months of the 24-month period, since only 68% of the fair market value of the assets of the two Parentcos would be attributable to qualifying assets during that six month period (i.e., active business assets (56%), shares (8%) and indebtedness (4%)). However, since the Parentcos do not have to rely upon the shares and indebtedness they hold in their respective subsidiaries in order to meet the 50% asset test of paragraph (c) of the definition during the first six months of the 24-month period, the fact that the 90% test would apply in respect of the assets owned by the subsidiaries would be of no consequence.
As regards the following 18-month period, the 90% asset test of paragraph (d) of the definition of "qualified small business corporation share" would not apply, since all or substantially all (i.e., 90%) of the fair market value of the assets of the Parentcos during that period would be attributable to qualifying assets (i.e., indebtedness (40%), shares (12%) and active business assets (48%)).
Therefore, the reference in paragraph (d) of the definition of "qualified small business corporation share" to "any particular period of time in the 24-month period ending at the determination time" limits the application of the 90% asset test to such period. However, even in cases where the 90% asset test applies during a particular period of time in the 24-month period, if more than 50% of the fair market value of the assets of the subject corporation are, during that period, attributable to assets used principally in an active business carried on primarily in Canada, as indicated above, the fact that the 90% asset test would apply to the subsidiary corporations may be irrelevant, as the subject corporation may meet the 50% asset test of paragraph (c) of the definition with reference only to its active business assets.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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