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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether paragraph 110.6(15)(b) applies for purposes of determining whether a share of a subsidiary is a share of the capital stock of a small business corporation.
Position: Generally no.
Reasons: Pursuant to the postamble of this paragraph, this provision applies only in determining whether a share in the capital stock of another corporation with which the particular corporation is connected, i.e., the parent, is a QSBCS.
XXXXXXXXXX 2001-010930
J. Gibbons, CGA
April 19, 2002
Dear XXXXXXXXXX:
We are replying to your letter dated November 1, 2001, concerning the interpretation of paragraph 110.6(15)(b) of the Income Tax Act (the "Act"). This provision helps to resolve the valuation problems which arise when applying certain definitions, including the definition of a "qualified small business corporation share" ("QSBCS") in subsection 110.6(1) of the Act, where there are mutual investments between a parent and a subsidiary corporation.
In your letter, you have asked us to consider the following two scenarios:
Scenario 1
? Mr. and Mrs. X. each own 50 percent of the shares of Holdco, a Canadian-controlled private corporation.
? Holdco and Mr. X each own 50 percent of Opco, a Canadian-controlled private corporation.
? Holdco's only asset is its shareholding in Opco.
? Opco's only assets are assets used principally in an active business carried on by it primarily in Canada and a debt receivable from Holdco.
You are of the view that paragraph 110.6(15)(b) would apply in determining whether a share of Holdco is a QSBCS. Accordingly, Opco's debt receivable from Holdco would be deemed to be nil, and the Holdco shares would therefore meet the definition of QSBCS. We agree with your view in this regard.
Scenario 2
This scenario is the same as the first scenario with the following exceptions:
? Holdco has a debt receivable from Newco, which is also owned 50 percent by each of Mr. and Mrs. X.
? Newco is not a small business corporation.
? Opco's assets consist of $516,000 cash, a $465,000 debt receivable from Holdco, and $331,000 of assets used principally in an active business carried on by it primarily in Canada
You have asked us whether the debt receivable from Holdco would be deemed to be nil in determining the ratio of Holdco's active business assets to total assets. Also, you enquired whether, if Mr. X were to sell his Opco shares rather than his Holdco shares, subparagraph 110.6(15)(b) would apply to deem Opco's debt receivable from Holdco to be nil.
Since your second scenario appears to relate to actual proposed transactions, we refer you to our policy in this regard in Information Circular IC 70-6R4. This circular explains, among other things, that it is our policy not to provide written confirmation of the tax implications inherent in particular transactions unless an advance ruling request is submitted in the manner set out in the circular. Thus, if you have proposed transactions in mind, you should consider requesting an advance ruling. Nonetheless, we have provided you with the following general comments.
As indicated in the postamble to paragraph 110.6(15)(b), this provision applies only in determining whether a share in the capital stock of another corporation with which the particular corporation is connected, i.e., the parent company, is a QSBCS. Accordingly, it is our view that paragraph 110.6(15)(b) typically applies to situations where it is to be determined whether a share of the capital stock of a parent company is a QSBCS and the subsidiary owns shares or indebtedness of the parent company. Thus, in determining whether a share in the capital stock of Holdco is a QSBCS, it is our view that paragraph 110.6(15)(b) would apply to deem Opco's debt receivable from Holdco to be nil. On the other hand, if Mr. X were to sell his shares in Opco, it is our view that paragraph 110.6(15)(b) would not apply in determining whether a share in the capital stock of Opco is a QSBCS. As a result, Opco's debt receivable from Holdco would not be deemed to be nil in this case.
We trust that these comments will be of assistance.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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