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.
DOCUMENT TYPE: Opinion
Principal Issues: Whether the shares owned by a taxpayer are considered to be "qualified small business corporation shares"?
Position: Question of fact, general comments provided.
Reasons: Question of fact, insufficient facts provided.
2003-003499
XXXXXXXXXX Karen Power, CA
(613) 957-8953
December 18, 2003
Dear XXXXXXXXXX:
Re: Capital Gains Deduction - "Qualified Small Business Corporation Share"
We are writing in reply to your letter of August 21, 2003, wherein you requested our views on whether shares you have owned for a number of years in XXXXXXXXXX would meet the requirements of "qualified small business corporation share" ("QSBC share") as defined in subsection 110.6(1) of the Income Tax Act (the "Act").
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 capital gain on the disposition of a QSBC share, as defined in subsection 110.6(1) of the Act, may be entitled to a capital gains deduction in calculating his or her taxable income according to subsection 110.6(2.1) of the Act.
In general terms, as explained in the Capital Gains Guide, a share of a corporation will be a QSBC share if all the following conditions are met:
(a) at the time of disposition, it was a share of the capital stock of a "small business corporation" (explained below), and it was owned by you, your spouse or common-law partner, or a partnership related to you;
(b) throughout the 24 months immediately before the share was disposed of, no one owned the share other than you, or a person or partnership related to you (special rules apply to shares which are disposed of within 24 months of their issue by a corporation);
(c) throughout that part of the 24 months immediately before the share was disposed of, while the share was owned by you, or a person or a partnership related to you, it was a share of a Canadian-controlled private corporation and more than 50% of the fair market value of the assets of the corporation was attributable to:
? assets used principally in an active business carried on primarily in Canada by the Canadian-controlled private corporation, or by a related corporation;
? certain shares or debts of connected corporations; or
? a combination of these two types of assets.
Subsection 248(1) of the Act defines "small business corporation", in part, as: "...a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
(b) shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation ... or
(c) assets described in paragraphs (a) and (b)..."
In our view "all or substantially all" means 90% or more.
Subsection 248(1) of the Act defines "active business" in relation to a taxpayer resident in Canada as any business carried on by the taxpayer other than a specified investment business or a personal services business. The expression "specified investment business" is defined in subsection 125(7) of the Act, and means "a business (other than...a business of leasing property other than real property) the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property but...does not include a business...where
(a) the corporation employs in the business...more than 5 full-time employees, or
(b) any other corporation associated with the corporation provides...managerial, administrative... or other similar services to the corporation...and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided".
It is a question of fact whether at any time a corporation carries on an active business or a specified investment business, which can only be determined after an examination of all relevant facts in a particular situation. Furthermore, it is possible for a corporation to carry on more than one business simultaneously. In particular, we note that XXXXXXXXXX is earning rental income from an apartment and depot. Such rental income may impact whether the shares of XXXXXXXXXX will qualify of QSBC shares.
You have expressed some concerns as to when your XXXXXXXXXX business would be considered to have commenced. As mentioned in paragraph 2 of Interpretation Bulletin IT-364, Commencement of Business Operations, it is not possible to be specific about the point in time when a contemplated business becomes an actual business. Generally speaking, it is the Canada Revenue Agency's view that a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations. In order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries. This requirement is applicable whether the projected business is intended to be a continuing one or is to be a single transaction in the form of an adventure in the nature of trade. Where an activity consists merely of a review of various business possibilities in the expectation or hope that information will be obtained to justify going into a business of some kind, such an activity does not represent the commencement of a business. A business would be reviewed as being merely contemplated for the future if no serious or reasonably continuous efforts are being made to begin normal business operations. The issue of whether a business has commenced is best resolved by officials of your local Tax Services Office, as they are in a better position to appreciate all the facts of each case. Nonetheless, based on the limited facts provided it would appear that the XXXXXXXXXX business referred to in your letter likely commenced closer to the date of XXXXXXXXXX.
A review of all of the facts surrounding a situation would be required to conclusively resolve whether particular shares meet the requirements of QSBC shares. Considering the complexity of the tax issues involved with respect to this subject matter, you may want to consult with a legal and/or tax professional to assist you in establishing your entitlement to claim the capital gains deduction under subsection 110.6(2.1) of the Act. We have enclosed copies of all relevant information circulars and interpretation bulletins for your information.
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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