CRA confirms that a Realtyco, whose shares qualified as QSBCS based on a related corporation’s active business, would be a “relevant group entity” on a sale of the latter’s shares

The control test, contained in s. 84.1(2.31)(c), generally requires that the parent(s) not have de facto control, after the disposition to the children’s purchaser corporation, of such purchaser corporation, the subject corporation, or any other person or partnership (a “relevant group entity”) that carries on, at the disposition time, an active business that is relevant to the qualification of the shares of the subject corporation as qualified small business corporation shares (QSBCS). There is a parallel rule in s. 84.1(2.32)(c), restricted to the de jure control test.

Two spouses were the equal shareholders of Opco, with an active (telecommunications services) business. One of the spouses (Mr. A) wholly owned Realtyco, whose only asset of consequence was an immovable that it leased to Opco for use in the Opco operations.

CRA confirmed that, in relation to a sale of the shares of Opco by the two spouses to the Holdco of their adult child for non-share consideration, Realtyco would not be considered a relevant group entity, so that continued control of Realtyco by Mr. A would not oust the exception from the application of s. 84.1 for intergenerational transfers of QSBCSs.

Conversely, on a sale of Realtyco by Mr. A to Holdco, would Opco be considered a relevant group entity? CRA indicated that, since Opco carried on an active business and such business of a related corporation was relevant to the qualification of the shares of Realtyco as QSBCS, Opco would be a relevant group entity in connection with such disposition of Realtyco shares.

Neal Armstrong. Summary of 29 April 2025 External T.I. 2024-1036641E5 F under s. 84.1(2.32)(c)(iii).