21 November 1989 External T.I. 58755 F - Stock Split

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.

November 21, 1989

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We are writing in reply to your letter of September 22, 1989, wherein you requested our views as to whether the stock split, described in your letter, would disqualify the shares as being "qualified small business corporation shares", as defined in subsection 110.6(1) of the Income Tax Act, because of the holding period requirement.

Our understanding of the situation described in your letter is as follows:

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Your analysis of the relevant provisions in the Act, along with the Department's position set out in IT-65, is as follows:

For a share to qualify as a share of a qualified small business corporation, a "holding period test" must be met as the share must be:

     "a share of the capital stock of a corporation that throughout the 24 months immediately preceding the determination time, was not owned by anyone other than the individual or a person or partnership related to the individual..."

However, paragraph 110.6(14)(f) provides the following::

     "shares issued after June 13, 1988 by a corporation to a particular person... shall be deemed to have been owned immediately before the issue by a person who was not related to the particular person ...unless the shares were issued

     (i)  as consideration for other shares, or

     (ii)  as part of...a series of transactions in which the person...disposed of property to the corporation that consisted of all or substantially all of the assets used in an active business carried on by that person..."

If a stock split results in a corporation issuing shares, then a literal reading of the paragraph may disqualify the share as being a share of a qualified small business corporation.  This is so because criteria (ii) is clearly not met an criteria (i) may not be met since the shares received were issued as a split of the existing share and not as consideration for other shares.

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IT-65, "Stock splits and Consolidations" provides the following:

     "Where all the shares of a class of stock of a corporation are replaced by a greater or lesser number of shares of the same class of stock of the same corporation in the same proportion for all shareholders, in circumstances where there is no change in the total capital represented by the issue, there is no change in the interests, rights or privileges of the shareholders and there are concurrent changes in the capital structure of the corporation or the rights and privileges of other shareholders, no disposition or acquisition is considered to have occurred".

In this situation,

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Our Comments

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In conclusion, we are in basic agreement with the conclusions reached in your letter.  We hope these comments are of assistance.

Yours truly,

for DirectorBusiness and General divisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch