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) will apply to deem the fair market value of a loan receivable by Cco from Bco to be nil.
Position: No
Reasons: In the facts provided, Bco does not own and is not deemed to own shares of the capital stock of Cco, consequently Cco is not connected with Bco within the meaning of paragraph (d) of the definition QSBC share in subsection 110.6(1) and paragraph 110.6(15)(b) of the Act would have no application.
2003-002537
XXXXXXXXXX Karen Power, CA
(613) 957-8953
August 29, 2003
Dear XXXXXXXXXX:
Re: "Qualified Small Business Corporation Share"
We are writing in reply to your facsimile of June 20, 2003, wherein you requested our comments on whether shares of a particular corporation would meet the requirements of "qualified small business corporation share" ("QSBC share") as that term is defined in subsection 110.6(1) of the Income Tax Act (the "Act").
You describe a situation in which a Canadian-controlled private corporation ("CCPC") as defined in subsection 125(7) of the Act (herein after referred to as "Aco") is carrying on an active business primarily in Canada. All of Aco's shares are owned by an individual. Aco has had up to 20% of the fair market value of its assets in non-qualifying investments over the past 24 months; however, you indicate that these investments will be removed before the determination time. In addition, Aco has two wholly owned subsidiaries, Bco and Cco. Both Bco and Cco are CCPCs and carry on active business primarily in Canada. All or substantially all of the fair market value of Bco's assets are attributable to assets described in subparagraph (c)(i) of the definition of QSBC share in subsection 110.6(1) of the Act. Cco has a loan receivable from Bco that represents 25% of the fair market value of its total assets, and we assume that the balance of Cco's assets consists of assets described in subparagraph (c)(i) of the definition of QSBC share. The shareholders and their shareholdings in these three corporations have not changed in the past 24 months.
You enquire whether the shares of Aco would be considered QSBC shares. You refer to paragraph (d) of the definition of QSBC share in subsection 110.6(1) and to paragraph 110.6(15)(b) and enquire whether the loan receivable by Cco from Bco would prevent Cco from meeting an all or substantially all test.
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 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 shares to qualify as QSBC shares, the conditions in inter alia paragraph (c) of the definition of QSBC share in subsection 110.6(1) of the Act must be met. The asset test, imposed by paragraph (c) of the definition, requires that, throughout that part of the 24 months immediately preceding the determination time while the share was owned by the individual or a person or partnership related to the individual, more than 50% of the fair market value of the CCPC's assets must have been attributable to assets described in any of subparagraphs (c)(i) to (c)(iii).
In determining the value yielded under subparagraph (c)(ii), it is necessary to consider the implications of paragraph (d) of the definition of QSBC share in subsection 110.6(1) of the Act. Paragraph (d) provides, in part, that "where...all or substantially all of the fair market value of the assets of a particular corporation...cannot be attributed to assets described in subparagraph (c)(i), shares or indebtedness of corporations described in clause (c)(ii)(B), or any combination thereof, the reference in clause (c)(ii)(B) to 'more than 50%' shall...be read as a reference to 'all or substantially all' in respect of each other corporation that was connected with the particular corporation". We have not been provided with sufficient information on the asset structure of the above corporations in order to assess the impact of paragraph (d) of the definition of QSBC share, on Aco shares qualifying as QSBC shares; however, as requested we have focused our discussion on Cco meeting the all or substantially all test referred to in paragraph (d) and the implications of paragraph 110.6(15)(b) of the Act.
In determining whether Cco meets the all or substantially all test, you enquire whether paragraph 110.6(15)(b) of the Act would deem the indebtedness of Bco to be nil. Paragraph 110.6(15)(b) of the Act was introduced to resolve the circularity problem which exists where one corporation must rely upon another corporation, which in turn must rely on the first mentioned corporation, to qualify as a small business corporation or for the enhanced capital gains exemption. Paragraph 110.6(15)(b) reads as follows:
"For the purposes of the definitions 'qualified small business corporation share' and 'share of the capital stock of a family farm corporation' in subsection (1), the definition 'share of the capital stock of a family farm corporation' in subsection 70(10) and the definition 'small business corporation' in subsection 248(1),...
(b) the fair market value of an asset of a particular corporation that is a share of the capital stock or indebtedness of another corporation with which the particular corporation is connected shall be deemed to be nil and, for the purpose of this paragraph, a particular corporation is connected with another corporation only where
(i) the particular corporation is connected (within the meaning assigned by paragraph (d) of the definition 'qualified small business corporation share' in subsection (1)) with the other corporation, and
(ii) the other corporation is not connected (within the meaning of subsection 186(4) as determined without reference to subsection 186(2) and on the assumption that the other corporation is a payer corporation within the meaning of subsection 186(4)) with the particular corporation,
except that this paragraph applies only in determining whether a share of the capital stock of another corporation with which the particular corporation is connected is a qualified small business corporation share or a share of the capital stock of a family farm corporation and in determining whether the other corporation is a small business corporation."
One of the requirements for paragraph 110.6(15)(b) to deem Cco's indebtedness of Bco to be nil, is that Cco must be connected with Bco within the meaning assigned by paragraph (d) of the definition QSBC share in subsection 110.6(1). Pursuant to subparagraph (d)(ii) of the definition of QSBC share, a corporation will be considered connected with another corporation only where the other corporation owns shares of the capital stock of the corporation. For purposes of subparagraph (d)(ii), shares owned indirectly by the other corporation through any number of levels of corporations are deemed to be owned by the other corporation. In the situation you describe, Bco does not own and is not deemed to own shares of the capital stock of Cco, consequently Cco is not connected with Bco within the meaning of paragraph (d) of the definition QSBC share in subsection 110.6(1) and paragraph 110.6(15)(b) of the Act would have no application. In our view, no circularity problem exists in the given situation.
Based on our understanding that all or substantially all of the fair market value of Bco's assets are attributable to assets described in subparagraph (c)(i) of the definition of QSBC share in subsection 110.6(1) of the Act, Cco's indebtedness of Bco would be taken into account in establishing whether Cco meets the all or substantially all test referred to in paragraph (d), as it applies for clause (c)(ii)(B) of the definition. Please note that for purposes of subparagraph (c)(ii) of the definition of QSBC share, Bco is connected with Cco, as it is connected with Cco within the meaning of subsection 186(4), by virtue of subsections 186(2) and 186(7) of the Act.
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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