25 January 1989 Income Tax Severed Letter 5-7128 - [Capital Gains Exemption on Shares of Qualifying Small Business Corporations]

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.

Revenue Canada Taxation Head Office

XXXX

B. Dwyer (613)957-2744

January 25, 1989

Dear Sirs:

Re: Capital Gains Exemption on Shares of Qualifying Small Business Corporations

This is in reply to your letter dated November 24, 1988. In that letter, you requested our views on the application of section 110.6 of the Income Tax Act (Canada) (the "Act") in the context of the following facts.

1) Mr. A. and Mr. B. (unrelated parties to one another) own 100% respectively of A Holdco and B Holdco.

2) A Holdco and B Holdco own respectively 50% each of Opco and have done so for a number of years.

3) The shares of A Holdco, B Holdco and Opco are all "Qualified Small Business Corporation Shares" for purposes of section 110.6 of the Act.

4) Mr. A. and Mr. B. propose to cause a statutory amalgamation (qualifying under Section 87 of the Act) of A Holdco, B Holdco and Opco to form a new corporation ("Amalco") in which Mr. A and Mr. B will each own 50% of the issued shares.

5) Mr. A. and Mr. B. propose to dispose of their shares of Amalco immediately after the amalgamation to Mr. C, an unrelated party, at fair market value.

You wish to know whether the shares of Amalco will constitute "qualified small business corporation shares" in the hands of Mr. A and Mr. B, thereby entitling each of Mr. A and Mr. B to claim the $500,000 capital gains exemption on the disposition of the Amalco shares.

To the extent that the above facts represent actual proposed transactions, your enquiry should be the subject of a request for an advance income tax ruling.

However, based on the above facts, in out view paragraph (e) of the definition "qualified small business corporation share" in subsection 110.6(1) of the Act would not prevent the Amalco shares from being qualified small business corporation shares.

Whether an individual may claim a deduction under section 110.6 depends on numerous factors, including the cumulative gains limit of that individual for the taxation year in question.

The opinions expressed in this letter are of a purely general nature and do not take into account considerations that might arise in the context of a specific transaction. In accordance with paragraph 24 of Information Circular 70-6R, the opinions expressed herein do not constitute an advance income tax ruling and consequently are not binding on the Department.

Yours truly,

for Director Reorganizations & Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch