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.
Principal Issues: Whether new subsection 249(3.1) adversely impacts application of s. 110.6(14)(b)?
Position: No.
Reasons: Where the provision is applicable, s. 249(3.1) deems taxation year of corporation whose CCPC status has changed to have ended immediately before the time of the change (subject to any election under s. 249(3.1)(c)). Even if year end is deemed to have occurred, the determination of whether the shares of the corporation are "qualified small business corporation shares" is still made without regard to any s. 251(5)(b) rights under a purchase and sale agreement relating to a share of the capital stock of the corporation.
J. MacGillivray
XXXXXXXXXX (613) 957-2053
2006-021469
April 20, 2007
Dear Madam:
Re: "Qualified small business corporation share" Status
We are writing in response to your e-mail of November 15, 2006, in which you asked whether subsection 249(3.1) of the Income Tax Act (Canada) (the "Act"), which was enacted into law on February 21, 2007, would preclude shares of a corporation from constituting "qualified small business corporation shares" ("QSBC shares"), as defined in subsection 110.6(1), in the following hypothetical situation:
- Corporation A was a "Canadian-controlled private corporation" ("CCPC"), as defined pursuant to subsection 125(7), and its shares qualified as QSBC shares.
- In 2006, the shareholders of Corporation A entered into a purchase and sale agreement with Corporation B, a "public corporation", as defined pursuant to subsection 89(1), whereby Corporation B would acquire all of the issued and outstanding shares of Corporation A at the end of 2006.
You have indicated that Corporation A would cease to be a CCPC on the date the purchase and sale agreement was made since Corporation B would have acquired a right described within subparagraph 251(5)(b)(i) to acquire all of the shares of Corporation A under the purchase and sale agreement. However, in determining whether the shares of Corporation A were QSBC shares at the time they were disposed of by the shareholders of Corporation A in accordance with the purchase and sale agreement, you have indicated that this right would be disregarded by virtue of paragraph 110.6(14)(b) of the Act.
You have asked whether subsection 249(3.1), which, among other things, may apply to deem a taxation year of a corporation to have ended immediately before a time at which the corporation becomes or ceases to be a CCPC, would override the application of paragraph 110.6(14)(b) in the foregoing situation.
Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
Paragraph 110.6(14)(b) provides that in determining whether a corporation is a small business corporation or a CCPC for the purposes of the QSBC share definition in subsection 110.6(1), a right referred to in paragraph 251(5)(b) shall not include a right under a purchase and sale agreement relating to a share of the capital stock of a corporation. Therefore, assuming all other requirements are met, a deduction may still be claimed under subsection 110.6(2.1) in respect of a disposition of shares of a corporation notwithstanding that the corporation has ceased to be a CCPC due to a purchase and sale agreement under which a non-resident or public corporation would acquire a controlling block of shares of the corporation.
In the above example, it is our view that while the taxation year of Corporation A may be deemed to have ended pursuant to subsection 249(3.1) as a result of the corporation ceasing to be a CCPC, the shares of Corporation A would not be precluded from being considered QSBC shares under subsection 110.6(1) at the time they are disposed of by the shareholders of Corporation A solely because Corporation B acquired rights to acquire the shares of Corporation A under the purchase and sale agreement. The operation of paragraph 110.6(14)(b) is not affected by subsection 249(3.1).
Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular IC-70-6R5.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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