CRA confirms that a related Rentalco would generally not be a relevant group entity under s. 84.1(2.31)(c)(iii)

S. 84.1(2.31)(c) (and, somewhat similarly, s. 84.1(2.32)(c)) generally requires that the parent(s) not control, after the disposition to the children’s purchaser corporation, 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).

Mr. A and his spouse were the equal shareholders of Opco, with an active business, and Mr. A wholly owned Realco, whose only significant asset was a building that it leased to Opco for use in its operations. 2024-1036641E5 F concluded that, in relation to a sale of the shares of Opco by the two spouses to the Holdco of their adult child, Realco would not be considered a relevant group entity. Would this result change if Opco had a loan receivable from Realco?

Whether Realco was a relevant group entity rested on (i) whether it carried on an active business at the time of disposition and (ii) whether such active business was relevant in determining whether the Opco shares were QSBCS.

Regarding the first test, Realco was carrying on a specified investment business and thus was not carrying on an active business at the time of the disposition. Although s. 129(6)(b) might deem rental income earned by Realco from Opco to be income from an active business for purposes of ss. 129(6) and 125, this deeming rule does not apply for purposes of ss. 84.1(2.31) and (2.32).

If, for discussion purposes, it nonetheless were assumed that Realco carried on an active business, then in applying the second test, it would be necessary to determine if all or any portion of the FMV of the loan receivable was needed for the Opco shares to be considered as QSBCS. In other words, if Opco could meet all the conditions of having QSBCS by reference to the fair market value of other assets, that is, treating the loan receivable as an inactive asset, then Realco would not be a relevant group entity.

Neal Armstrong. Summary of 2 December 2025 CTF Roundtable, Q.6 under s. 84.1(2.31)(c)(iii).