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:
1. Would Aco be considered a payer corporation that is connected with Cco for the purposes of the preamble in subparagraph (c)(ii) of the definition of qualified small business corporation share in subsection 110.6(1) of the Act?
POSITION:
1. Question of fact. However, appears to meet the requirements.
REASONS:
1. Our reading of the legislation.
2002-016638
XXXXXXXXXX Allan Nelson CMA
(613) 443-7253
January 10, 2003
Dear XXXXXXXXXX:
Re: Technical Opinion Request
We are writing in reply to your letter to us dated October 1, 2002, wherein you asked for clarification concerning the definition of qualified small business corporation share ("QSBC share") in subsection 110.6(1) of the Income Tax Act (Canada) (the "Act").
Background
You described the following hypothetical fact situation:
? Aco, Bco and Cco are each a Canadian-controlled private corporation ("CCPC"), as defined in subsection 248(1) of the Act;
? All of Aco's issued and outstanding shares are owned equally by Mr. and Mrs. A. Its assets consist solely of 100% of the issued and outstanding shares of Bco, plus debt owing from Bco;
? all of Bco's assets are used principally in an active business carried on by it primarily in Canada;
? Cco is owned 100% by Mr. A's mother ("MomA"). Cco's assets consist of debt owing from Aco (70% of the fair market value of Co's assets) and assets used principally in an active business carried on primarily in Canada by Cco (30%);
? by virtue of section 251 of the Act, Cco does not deal at arm's length with Mr. and Mrs. A;
? there has been no change in the type and fair market value of assets held by the aforementioned three companies for the last 24 months prior to the "determination time" contemplated in the QSBC share definition in subsection 110.6(1) of the Act (for greater certainty there has been no intercompany indebtedness other than as described above); and
? the shareholders and their shareholdings of the aforementioned three companies have been the same for the last 24 months prior to the "determination time".
It is your understanding that Aco would not be considered a "payer corporation" that would be connected with Cco, for the purposes of paragraph (c) of the definition of QSBC share in subsection 110.6(1) of the Act. Since 70% of Cco's assets consist of debt in Aco, each of the shares of Cco would not be considered a QSBC share, as defined in subsection 110.6(1) of the Act.
One of the requirements in order for MomA's shares in Cco to be QSBC shares is that the conditions in paragraph (c) of the definition of QSBC share in subsection 110.6(1) of the Act be met. Since only 30% of the fair market value of Cco's assets is attributable to assets used principally in an active business, the application of subparagraph (c)(i) of the definition to the facts in this case is insufficient to meet the more than 50% "fair market value of the assets" test (referred to hereafter as the "50% Asset Test") in the preamble to paragraph (c) of the definition of QSBC share in subsection 110.6(1) of the Act. If the 50% Asset Test is to be met, the application of subparagraph (c)(ii) of the definition to the facts at hand must result in a value, which, coupled with the value yielded by application of subparagraph (c)(i), would meet the 50% Asset Test.
As discussed with you during our December 10, 2002, telephone conversation (Nelson/XXXXXXXXXX), we will limit the balance of our discussion to your question of whether Aco would be considered a payer corporation that is connected with Cco for the purposes of the preamble in subparagraph (c)(ii) of the QSBC share definition in subsection 110.6(1) of the Act (the "Preamble"). The Preamble states
(ii) shares of the capital stock or indebtedness of one or more other corporations that were connected (within the meaning of subsection 186(4) on the assumption that each of the other corporations was a "payer corporation" within the meaning of that subsection) with the corporation where
In addressing the question of whether Aco was connected with Cco, the Preamble refers to subsection 186(4) of the Act and requires that it be read assuming that Aco was a payer corporation.
Subsection 186(4) of the Act states "...a payer corporation [Aco in this case] is connected with a particular corporation [Cco in this case] at any time in a taxation year...if (a) the payer corporation [Aco] is controlled...by the particular corporation [Cco] at that time..."
In determining whether Aco is controlled by Cco we must also consider the provisions of subsections 186(7) and (2) of the Act.
Subsection 186(7) of the Act states "...where a provision of this Act [the Preamble in this case]...indicates that the term "connected" has the meaning assigned by subsection 186(4), that meaning shall be determined by taking into account the application of subsection 186(2) unless the provision expressly provides otherwise."
Subsection 186(2) of the Act states "...one corporation [Aco in this case] is controlled by another corporation [Cco in this case] if more than 50% of its issued share capital [Aco's share capital] (having full voting rights under all circumstances) belongs to...persons with whom the other corporation [Cco] does not deal at arm's length [Mr. and Mrs. A in this case]..."
Applying subsection 186(2) of the Act, Cco would control Aco. This is so because more than 50% of Aco's issued share capital belongs to persons with whom the Cco does not deal at arm's length [i.e., all of Aco's issued shares are owned by Mr. and Mrs. A who are persons with whom Cco does not deal at arm's length].
Since Cco controls Aco, the conditions of subsection 186(4) are met and Aco would be a payer corporation that is connected with Cco for the purposes of the Preamble. Accordingly, based on the limited facts provided in this instance, it would appear that MomA's shares in Cco would meet the 50% Asset Test noted above.
In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the Canada Customs and Revenue Agency.
We hope the above will be of assistance to you.
Yours truly,
Milled Azzi CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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