23 April 2003 External T.I. 2003-0012695 - QSBC SHARE-24 MTH HOLDING PERIOD TEST

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: Do certain shares qualify as "qualified small business corporation" shares?

Position: Likely no.

Reasons: The 24 month holding period requirement has not been met. Paragraph 110.6(14)(f) deems the newly issued shares to be owned by an unrelated person.

		2003-001269
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
April 23, 2003

Dear XXXXXXXXXX:

Re: "Qualified Small Business Corporation Share"

We are writing in reply to your letter of March 14, 2003, wherein you requested our views on whether certain shares would be considered "qualified small business corporation shares" as defined in subsection 110.6(1) of the Income Tax Act (the "Act"), by virtue of subparagraph 110.6(14)(f)(ii) of the Act.

You describe a situation in which a taxpayer "Mr. X" owns and operates a trucking business that he has carried on as a proprietor for several years. Mr. X wishes to retire in two years and does not expect to find one buyer for all of his trucks. Rather, it is anticipated that Mr. X will have to seek out several buyers who will each want to acquire one or two trucks together with their corresponding contracts. Rather than sell the assets directly, Mr. X would transfer the trucks and their corresponding contracts to separate corporations. The shares of these corporations would then be sold to different buyers.

Our comments

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, 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. Should your situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance.

An individual who realizes a gain on the disposition of a qualified small business corporation (QSBC) share, as defined in subsection 110.6(1) of the Act, may be entitled to a deduction in calculating his or her taxable income according to subsection 110.6(2.1) of the Act. In order for a share to so qualify, the corporation must be a small business corporation, as defined in subsection 248(1) of the Act, and among other requirements 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 immediately preceding its disposition. This ownership test does not require the individual to actually hold the shares for 24 months, merely that no unrelated person or partnership hold the shares during that period. For those purposes, paragraph 110.6(14)(f) of the Act provides that shares issued by a corporation after June 13, 1988 are deemed to have been owned immediately before their issue by a person not related to the person or partnership to whom the shares were issued, unless the shares were issued in specific circumstances described therein. Subparagraph 110.6(14)(f)(ii) provides in part that shares issued "as part of a transaction or series of transactions in which the person ..... disposed of property to the corporation that consisted of (A) all or substantially all the assets used in an active business carried on by that person...." (emphasis ours) are not subject to this deeming rule. Generally, where 90% or more of the assets of the business are disposed to a corporation, all or substantially all of the assets of such business will be considered disposed of to that corporation.

In the situation that you describe, if the bundle of assets that are disposed of to each corporation do not represent all or substantially all of the assets of a separate active business of the taxpayer, we are of the opinion that clause 110.6(14)(f)(ii)(A) would not apply. Consequently, the newly issued shares would be deemed to have been owned immediately before their issue by a person not related to Mr. X and could not meet the requirements of a QSBC share as defined in subsection 110.6(1) of the Act until they have been owned by Mr. X for at least 24 months.

Whether a taxpayer has one or more businesses is a question of fact that can be resolved only after a detailed analysis of the facts surrounding a particular situation. In this regard one may consult Interpretation Bulletin IT-206R, Separate Businesses, which lists factors to consider in determining whether a taxpayer has more than one business. Although we have not been provided sufficient information to make a conclusive determination on this issue, in our view, it is unlikely that your client's trucking business consists of several separate businesses.

Copies of information circulars and interpretation bulletins referred to herein are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

We trust our comments 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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