30 June 1989 External T.I. 58190 F - Small Small Business Corporation Shares

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.

June 30, 1989

Dear Sirs:

Re:  Section 110.6 of the Income Tax Act (the "Act")

This is in response to your letter of June 2, 19889, wherein you requested our comments regarding the application of subsection 87(4) of the Act, paragraph (e) of the definition of a qualified small business corporation share in subsection 110.6(1) of the Act, and paragraph 110.6(14)(a) of the Act in the following hypothetical situation.

1.     Mr. A acquired all the issued shares of company X and 90%  of the issued shares of Company Y more than 24 full months ago.

2.     The remaining 10% of the issued shares of Company Y were acquired from an unrelated party 12 months ago.

3.     Both Company X and Company Y are small business corporations.

4.     Mr. A continued to won all the shares in companies X and Y until the two companies were amalgamated.

5.     Upon the amalgamation Mr. A's 200 aggregate shares of the predecessors were converted into 200 shares of Amalco.

6.     At the time of the amalgamation, the 10% of the shares of Company Y acquired 12 months ago had a fair market value equal to 3% of the then fair market value of Amalco.

You wish to know whether 97% of the issued shares of amalco will constitute "qualified small business corporation shares" in the hands of Mr. A, thereby entitling Mr. AS to claim the $500,000 capital gain exemption on a disposition of amalco shares.  You also wish to know whether paragraph 110.6(14)(a) will apply upon any subsequent disposition of the shares of Amalco.

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 be applicable so that 97% of the shares of Amalco will be "substituted shares" and therefore, qualified small business corporation shares.

Since the shares of Amalco will be considered substituted shares,these new shares will have the same characteristics as the old shares and therefore be subject to paragraph 110.6(14)(a) of the Act which orders a disposition of identical properties.

As explained in paragraph 24 of Information Circular 70-6R, any written or verbal opinions are not rulings and are not binding upon Revenue Canada, Taxation in Respect of any taxpayer.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch