18 January 1990 Administrative Letter 58976 F - Capital Gains Exemption - Qualified Small Business Corporation Share

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.

January 18, 1990

Dear Sirs:

Re:  Qualified Small Business Corporation Share ("QSBC Share")

We are writing in response to your letter of October 20, 1989 wherein you requested our opinion as to whether the shares of Holdco at the "determination time" in the hypothetical situation described below would be "QSBC Shares" as that term is defined under subsection 110.6(l) of the Income Tax Act (the "Act").  The "determination time" is the particular time referred to in the definition of "QSBC Shares"'.

1.     Each of Mrs. A and Mrs. B owns 50% of Holdco.

2.     The only assets of Holdco, at the present time and for the 24 months immediately before the "determination time", are shares or debt of Opco.  In this regard we have assumed that the debt of Opco held by Holdco is a bond, debenture, bill, note, mortgage, hypothec or similar obligation and not some form of intercompany advance or receivable which is not evidenced by some formal documentation.

3.     Opco is owned 100% by Holdco.

4.     Opco carries on a business in its own name and also holds investments in Subco 1 and Subco 2.

5.     Opco carries on an active business but it has $350,000 or approximately 175 of the fair market value of its total assets of $2,050,000 in term deposits which are not assets used in the active business.  The assets of Opco and their fair market value at the present time are as follows:

6.     Subco 1 is owned 505 by Opco and 505 by an arm's length party.  Subco 1 carries on an active business and all of its assets are used in the active business at the present time.

7.     Subco 2 is owned 2/3 by Opco and 1/3 by an arm's length party.  Subco 2 also carries on an active business but it has at the present time assets of $100,000, or approximately 225 of the fair market value of its total assets of $450,000, which are not used in the active business.

8.     Holdco will qualify as a small business corporation within the meaning assigned under subsection 248(1) of the Act, at the determination time.

9.     The shares of all of the corporations referred to herein have been held for the requisite 24 month period and thus meet the requirements described in paragraph (b) of the definition of QSBC Share in subsection 110.6(l) of the Act.

10.     All corporations are Canadian-controlled private corporations ("CCPC's") within `the meaning assigned by paragraph 125(7)(b) of the Act, throughout the 24 month holding period.

To determine whether the shares of Holdco would meet the requirement described in subparagraph (c)(ii) of the definition of QSBC Share, one has to examine the fair market value of all of the assets of Opco for the entire 24 month period which ends immediately before the determination time.  You have only disclosed in your letter the estimated fair market value of all of the assets of Opco at the present time as described in 5 above, not the entire 24 month period.  Hence, we are not able to determine whether the shares or debt of Opco would have met the requirement in clause (c)(ii)(B).  Consequently, we are not able to determine whether the shares of Holdco would be QSBC Shares.

Assuming that the fair market value of the assets of Opco, Subco 1 and Subco 2 in each category throughout the entire 24 month period has been substantially the same as that described in 5, 6 and 7 above, then pursuant to paragraph (d) of the definition ofQSBC Share, the shares of Subco 2 would not be qualified assets. Also, Opco's term deposits of $350,000 would not be qualified assets.  However, as the aggregate fair market value of Opco's business assets of $950,000 and shares of Subco 1 of $300,000 held by Opco throughout the entire 24 month period was $1,250,000 which represented more than SOS of the total fair market value of all of the assets of Opco, it would appear that the shares or debt of Opco would meet the requirement described in clause (c)(ii)(B) throughout the 24 months immediately preceding the determination time. As a result, the shares of Holdco would appear to be QSBC Shares provided that Holdco is, in fact, a small business corporation at the determination time.

We would like to point out that, based on the facts set out above, the shares of Holdco would not be shares of a small business corporation at the determination time unless at that time the shares of Subco 2 also qualify as shares of a small business corporation as described in paragraph (b) of the definition of that term in subsection 248(l) of the Act.

The foregoing comments are not rulings and in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978, are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch