4 July 1989 Income Tax Severed Letter 5-8085 - [890518]

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Dear Sirs:

This is in reply to your letter of May 10, 1988 concerning the definition of a "qualified small business corporation share ("QSRCS") in subsection 110.6(1) of the Income Tax Act (the "Act"). In your letter you outlined the following hypothetical situation:

• • A holding corporation ("Holdco") was incorporated in British Columbia in January 1987.
• • 100% of the issued shares of Holdco are owned by a Canadian personal trust, the beneficiary of which is resident individual.
• • Holdco is assumed to be a Canadian controlled private corporation as defined in subsection 125(7) of the Act.
• • In February 1987, Holdco entered into a Limited Partnership agreement. Holdco made a capital contribution of $5 in order to obtain a 25% full participating interest. In addition, Holdco contributed a $400,000 loan to the partnership at prime + 1% to be repaid over five years by blended payments of principal and interest. The partnership interest and the loan receivable are Holdco's only assets.
• • Holdco's only liability is a $400,000 debt payable to a related person. The loan has the same terms as the loan made by Holdco to the partnership.
• • The partnership has been engaged in an active business since February 1987. All or substantially all of its assets are used in the active business.

You have requested our comments related to the following questions:

• 1) Will the shares of Holdco be considered to be shares of a small business corporation as defined in subsection 248(1) of the Act and as such be considered to be QSBC's in the above situation?
• 2) Does the policy as stated in the answer to question 51 of the 1986 Conference Report Round Table remain in effect?
• 3) Would it be appropriate to extend the definition of a small business corporation in subsection 248(1) of the Act to include both the interest in the partnership and any debt due from the same partnership?
• 4) Would the Department consider the loan receivable from the partnership to be a non-qualifying asset for the purposes of the QSBCS definition?

Our Comments

We offer the following comments related to the above hypothetical situation and the associated questions:

• 1) In our opinion, Holdco will qualify as a "small business corporation" as defined in subsection 248(1) of the Act. The partnership interest and the loan to the partnership will both be considered to be "assets that were used in an active business carried on primarily in Canada by the particular corporation". As such, provided the other requirements in the definition of QSBCS in subsection 110.6(1) are met, the shares of Holdco will be considered to be QSBCS's.
• 2) Our policy as stated in the answer to question 51 of the 1986 Conference Report Round Table remains in effect. Paragraph 6 of Interpretation Bulletin It - 486R [IT-486R] states that where a corporation has a partnership interest as one of its assets, it is the underlying partnership assets that are used in determining whether all or substantially all of the corporation's assets are used in an active business.
• 3) The phrase "assets that were used in an active business carried on primarily in Canada by the particular corporation", has been interpreted to include both an interest in a partnership which carries on an active business primarily in Canada and any loans to that partnership as such, an amendment to the definition in the Act is not required.
• 4) The Department would not generally consider the loan receivable from the partnership to be a non-qualifying asset for the purposes of the QSBCS definition in subsection 110.6(1) of the Act.

We trust our comments will be of assistance to you.