2 December 2025 CTF Roundtable Q. 6, 2025-1080701C6 - Intergenerational Business Transfer – Relevant Group Entity

Unedited CRA Tags

84.1(1), 84.1(2)(e), 84.1(2.31)(c)(iii), 84.1(2.32)(c)(iii), 84.1(2.31)(a), 84.1(2.32)(a), 110.6(1) "qualified small business corporation share", 248(1) "small business corporation"

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Text of Severed Letter

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 the CRA's conclusion in 2024-1036641E5 that Realco would not be a "relevant group entity" in respect of Opco would change if Opco had a Loan Receivable from Realco.

Position: Possibly. Realco would be a "relevant group entity" in respect of Opco if Realco carries on an active business at the disposition time and all or a portion of the Loan Receivable is needed by Opco in order to meet any of the conditions that are required to be met in order for Opco's shares to be QSBCS, as defined in 110.6(1).

Reasons: See below.

2025 CTF Annual Tax Conference

CRA Round Table

Question 6: Intergenerational Business Transfer – Relevant Group Entity

In CRA Document No. 2024-1036641E5, the CRA addressed whether an operating corporation (Opco) and a sister corporation (Realco) that owned a building leased to Opco were “relevant group entities,” as defined in subparagraphs 84.1(2.31)(c)(iii) and 84.1(2.32)(c)(iii). As described in that document, Opco was a CCPC, a small business corporation, operated a business selling telecommunications services, and was owned by spouses, Mr. A and Mrs. B, each of whom held 50 Class A voting shares in the capital stock of Opco. Realco was a CCPC, all the issued and outstanding shares of which were held by Mr. A.

Mr. A and Mrs. B wished to sell all of their shares of Opco to their adult child, Mr. C, who was also an employee of Opco and intended on taking over the business. Mr. C owned all of the issued and outstanding shares of Holdco, a CCPC through which Mr. C would acquire the Opco shares.

The CRA concluded, in part, that for purposes of subparagraphs 84.1(2.31)(c)(iii) and 84.1(2.32)(c)(iii), Realco was not a “relevant group entity” in respect of a disposition of the shares of Opco by Mr. A and Mrs. B to Holdco.

Would the CRA’s answer differ if Opco had a Loan Receivable from Realco at any point during the 24 month period described in the asset use test under the definition of “qualified small business corporation share” (QSBC share) in subsection 110.6(1), which is used in determining whether the Opco shares are QSBC shares?

Does the mere existence of the Loan Receivable make Realco a “relevant group entity,” or is the Loan Receivable simply relevant to determining whether the Opco shares are QSBC shares?

CRA Response

For the purposes of section 84.1, paragraph 84.1(2)(e) deems a taxpayer that disposes of shares that are capital property of the taxpayer (subject shares) to another corporation (purchaser corporation) to be dealing at arm’s length with the purchaser corporation at the time of the disposition, if all of the conditions described in subsection 84.1(2.31) or (2.32) are met. In the context of this question those conditions require, among other things, that the subject shares (i.e. the Opco shares) be QSBC shares at the time of their disposition. In addition, subparagraphs 84.1(2.31)(c) and (2.32)(c) restrict the taxpayer (either alone or together with a spouse or common-law partner) from controlling the subject corporation, the purchaser corporation or any “relevant group entity” after the disposition.

A “relevant group entity” is a person or partnership that carries on, at the disposition time, an active business (referred to as a “relevant business”) that is relevant to the determination of whether the Opco shares are QSBC shares.

In order for Realco to be a “relevant group entity” in respect of the disposition of the Opco shares there are two tests that must be met:

1. Realco must carry on an active business at the time of disposition; (Test 1) and

2. Such active business must be “relevant” to the determination of whether the Opco shares are QSBC shares (Test 2).

Test 1

For the purposes of the Act, “active business” is defined in subsection 248(1) as any business carried on by a taxpayer other than a specified investment business or a personal services business. The facts as outlined in CRA Document No. 2024-1036641E5 indicate that Realco owns a building that is leased in its entirety to Opco, and that Opco uses the building exclusively in its active business in Canada. In its response, the CRA assumed that the building is Realco’s only asset, that Realco’s business is limited to leasing the building and that Realco has no employees. Therefore, these facts suggest that Realco is carrying on a specified investment business and is not carrying on an active business at the time of the disposition.

In our view, although paragraph 129(6)(b) may deem the rental income earned by Realco from Opco (an associated corporation) to be income from an active business carried on by it in Canada for purposes of subsection 129(6) and section 125, the deeming rule would not result in Realco being considered to carry on an active business for purposes of subparagraphs 84.1(2.31)(c)(iii) and 84.1(2.32)(c)(iii).

Since Realco does not carry on an active business, it would not be a “relevant group entity” and Test 2 does not need to be considered.

Test 2

If we assume for discussion purposes that Realco does carry on an active business at the time of the disposition of the Opco shares, then it must be determined whether Realco’s active business is relevant to the determination of whether the Opco shares are QSBC shares.

In our view, Realco would be a “relevant group entity” in respect of a disposition of the Opco shares, if all or a portion of the FMV of the Loan Receivable is needed for the shares of Opco to be considered QSBC shares. Stated differently, if Opco can meet all of the conditions in the QSBC share definition by reference to the FMV of its other assets (i.e., by treating the Loan Receivable as representing a non-active asset), then Realco would not be a “relevant group entity.”

Komal Patel
2025-108070
December 2, 2025

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Summaries

Summary Under

Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(2.31) - Paragraph 84.1(2.31)(c) - Subparagraph 84.1(2.31)(c)(iii)

a related Rentalco would generally not be a relevant group entity

The control test, contained in s. 84.1(2.31)(c), generally requires that the parent(s) not have de facto control, after the disposition to the children’s purchaser corporation, of such purchaser corporation, the subject corporation, or any other person or partnership (a “relevant group entity”) that carries on, at the disposition time, an active business that is relevant to the qualification of the shares of the subject corporation as qualified small business corporation shares (QSBCS). There is a parallel rule in s. 84.1(2.32)(c), restricted to the de jure control test.

Two spouses were the equal shareholders of Opco, with an active business. One of the spouses (Mr. A) wholly owned Realco, whose only asset of consequence was a building that it leased to Opco for use in the Opco operations. 2024-1036641E5 F concluded that in relation to a sale of the shares of Opco by the two spouses to the Holdco of their adult child for non-share consideration, Realco would not be considered a relevant group entity, so that continued control of Realco by Mr. A would not oust the exception from the application of s. 84.1 for intergenerational transfers of QSBCS.

Would the result differ if Opco had a loan receivable from Realco at any point during the 24-month period described in the asset use test under the QSBCS definition?

CRA noted that the determination as to whether Realco was a relevant group entity rested on (i) whether it carried on an active business at the time of disposition and (ii) whether such active business was relevant in determining whether the Opco shares were QSBCS.

Regarding the first test, Realco, per the 2024 document, was carrying on a specified investment business and thus was not carrying on an active business at the time of the disposition. Although s. 129(6)(b) might deem rental income earned by Realco from Opco to be income from an active business for purposes of ss. 129(6) and 125, this deeming rule would not result in Realco being considered to carry on an active business for purposes of ss. 84.1(2.31) and (2.32).

If, for discussion purposes, it nonetheless was assumed that Realco carried on an active business, then in applying the second test, it would be necessary to determine if all or any portion of the FMV of the loan receivable was needed for the Opco shares to be considered as QSBCS. In other words, if Opco could meet all the conditions of having QSBCS by reference to the fair market value of other assets, that is, treating the loan receivable as representing an inactive asset, then Realco would not be a relevant group entity.

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2 December 2025 CTF Roundtable Q. 6, 2025-1080701C6 - Intergenerational Business Transfer – Relevant Group Entity

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