13 July 2010 External T.I. 2010-0359781E5 - Qualified Small Business Corporation Share

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: 1. Whether an individual must be resident in Canada throughout the 24 months immediately preceding the time of the disposition in order for a share to meet the holding period requirement referred to in paragraph (b) of the definition of "qualified small business corporation share" ("QSBCS") in subsection 110.6(1). 2. Whether an individual is eligible to claim the capital gains exemption under subsection 110.6(2.1) on the disposition of a share assuming it meets the definition of QSBCS.

Position: 1. No. 2. Yes if the individual (other than a trust) is resident in Canada throughout the year the individual disposed of the share.

Reasons: 1. However, the share must not have been owned by anyone other than the individual or a person or partnership related to the individual throughout the 24 months. 2. The preamble of subsection 110.6(2.1).

XXXXXXXXXX
					2010-035978
					Kathryn McCarthy, CA
					(613) 828-9377
July 13, 2010

Dear XXXXXXXXXX :

Re: Qualified Small Business Corporation Share

This is in response to your e-mail of March 9, 2010, concerning the definition of "qualified small business corporation share" ("QSBCS") in subsection 110.6(1) of the Income Tax Act ("the Act") and the application of subsection 110.6(2.1) of the Act.

You described a situation where an individual owns shares of a corporation for 30 months; during the first 10 months, the individual was a non-resident of Canada, and during the next 20 months the individual was a Canadian resident. The individual disposed of the shares during the 30th month. Throughout the entire 30-month period the corporation was a Canadian-controlled private corporation ("CCPC").

You enquired whether the individual must be resident in Canada throughout the 24 months immediately preceding the time of the disposition in order for the shares to meet the holding period requirement referred to in paragraph (b) of the definition of QSBCS in subsection 110.6(1) of the Act.

Further, you enquired whether the individual is eligible to claim the capital gains exemption under subsection 110.6(2.1) of the Act on the disposition of the shares assuming that they meet the definition of QSBCS. In other words, you are concerned with whether the individual is precluded from claiming the deduction under subsection 110.6(2.1) simply because at the time of disposition of the shares the individual has been resident in Canada for only 20 months.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Should the situation involve a specific taxpayer and a transaction that has already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. We are prepared to provide the following general comments, which may be of assistance.

A share of a corporation that is a CCPC is not precluded from meeting the definition of QSBCS simply because it is held by an individual who is not a resident in Canada. An individual is not required to be resident in Canada throughout the 24 months immediately preceding the disposition for purposes of meeting the holding period referred to in paragraph (b) of the definition of a QSBCS under subsection 110.6(1) of the Act. However, the share must not have been owned by anyone other than the individual or a person or partnership related to the individual throughout the 24 months.

In order to claim the capital gains deduction under subsection 110.6(2.1) of the Act for a share that meets the definition of QSBCS, an individual (other than a trust) is required to be resident in Canada throughout the year the individual disposed of the share. For the purposes of subsections 110.6(2) to (2.3) of the Act, in the year an individual becomes resident or ceases to be resident, subsection 110.6(5) of the Act deems the individual to have been resident in Canada throughout the particular year, providing the individual was also resident throughout either the immediately preceding or following year.

The amount in respect of capital gains and losses determined under paragraph 3(b) of the Act in respect of an individual for a period throughout which the individual was not resident in Canada is deemed to be nil by virtue of subsection 110.6(13) of the Act. Accordingly, such gains or losses realized while the individual was not resident in Canada do not affect the computation of the individual's entitlement to the capital gains exemption.

We trust the foregoing comments are of assistance.

Yours truly,

S. Parnanzone
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch