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
D. Turner (613) 957-2094
JUL - 4 1989
Dear Sirs:
Re: Qualified Small Business Corporation Shares
This is in reply to your letter of May 10, 1989 concerning the definition of a "qualified small business corporation where ("QSBCS") 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 a 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 QSBCS'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 Comment
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) 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.
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