12 May 1989 Income Tax Severed Letter 5-7627 - [Subsections 248(1) and 110.6(1)]

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.

A.W. Larochelle (613) 957-2140

Dear Sirs:

Re: Subsections 248(1) and 110.6(1) of the Income Tax Act (the "Act")

This is in reply to your letter of February 24, 1989 requesting our views on the definition of a "small business corporation" and "qualified small business corporation share" in the above-captioned provisions.

The facts regarding your enquiry as described in your letter are as follows:

1. Holdco a CCPC owns a number of subsidiaries. One of the subsidiaries, Opco has a fair market value in excess of 90% of the value of Holdco.

2. Opco's assets are used in its active business. Substantially all of the fair market value of Opco is attributable to the value of management contracts and goodwill.

3. The other subsidiaries of Holdco do not have substantially all of their assets used in an active business.

Based on the above facts you have asked us to comment on the following:

1. Whether the value of the contracts and goodwill in Opco would be considered assets used in an active business for the purpose of the definition of a small business corporation pursuant to subsection 248(1) and in paragraph (c) of the definition of qualified small business corporation share pursuant to subsection 110.6(1).

2. For the purpose of the test in paragraph (c) of the definition of a qualified small business corporation in share in subsection 110.6(1), whether only Opco, or all of the subsidiaries of Holdco will be required to meet the all or substantially all test throughout the portion of the 24 month holding period during which Holdco does not meet the "all or substantially all" test.

As discussed with you in our telephone conversation of March 28, 1989 whether assets, i.e. goodwill and mangement contract of Opco, are considered to be used in an active business is a question of fact that requires consideration of all the circumstances of the situation before it can be determined whether or not the operations of Opco constitute an active business. In this regard, we would suggest that you provide all of the relevant facts and documentation to the District Taxation Office where your client files and they may be able to assist you in resolving this matter.

For purposes of our reply to your second question we have assumed that all the subsidiaries involved are owned by Holdco. On this assumption where Holdco's holdings in Opco account for more than 50% of the fair market value of its assets, then only Opco must meet the 90% test. In these circumstances, there is no requirement as to the type of assets held that applies to the other subsidiaries.

As pointed out to you in our telephone conversation the comments expressed herein do not constitute an advance income tax ruling and consequently are not binding on the Department.

Original Signed By

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch