16 January 2011 External T.I. 2011-0423951E5 - QSBC Shares

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.

Principal Issues: Is active business carried on primarily in Canada?

Position: Question of fact.

Reasons: General comments.

XXXXXXXXXX 

					2011-042395
					Linda Compton

January 16, 2012

Dear XXXXXXXXXX :

Re: QSBC Shares

This is in response to your e-mail of October 11, 2011 requesting our views on the definition of "qualified small business corporation shares" ("QSBCS") in subsection 110.6(1) of the Income Tax Act (the "Act") as it pertains to a proposed sale of shares of a corporation that you describe as being a "Canadian-controlled private corporation" ("CCPC") that earns revenue from a website that provides online job postings.

You indicate that the particular website is based in and operated from Canada, but most of the corporation's revenue is earned from customers based outside of Canada. You have asked for our views on whether, for the purposes of the QSBCS definition, 50% or more of the fair market value of the assets of the corporation would be considered to have been used in an active business carried on primarily in Canada.

Comments:

It appears that your particular fact situation involves a proposed disposition of shares of a corporation. Written confirmation of the tax consequences that apply to a particular proposed fact situation is given by this Directorate only in the context of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the CRA Web site at www.cra-arc.gc.ca. However, we are prepared to provide the following general comments, which may be of assistance.

The definition of a QSBCS contains three main tests that must be met before the individual's shares can be considered as being QSBCS for these purposes. In respect of the issue you raised your primary concern appears to relate to whether a sufficient portion of the particular corporation's assets are used principally in an active business that is primarily carried on in Canada. For the CRA's general views on the meaning of active business and the meaning of CCPC, please refer to Interpretation Bulletins IT-73R6, The Small Business Deduction and IT-458R2, Canadian-Controlled Private Corporation.

Whether or not any business is being carried on in whole or in part in Canada (or some other jurisdiction) is a question of fact. As a general rule, in a traditional business (i.e., non e-commerce), such as the sale of goods, the most determinative factor is usually the place of the contract. Another factor to consider may be the country where the corporation is resident. Similarly, where a corporation's business involves the rendering of services, that business is generally considered to be carried on at the place or places where the services are rendered or performed. For the CRA's general views on determining where a particular business is carried on please refer to the comments in paragraph 23 of IT-270R3, Foreign Tax Credit.

In an e-commerce environment the above determination can be more complex than with more traditional forms of business. Notwithstanding this complexity, where a corporation operates a service business via a website from a server that is based and operated in Canada and where any related manual activity takes place in Canada, generally speaking, it would be our view that the corporation is carrying on business primarily in Canada.

Yours truly,

Michael Cooke
Manager
Capital Transactions Section
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch