21 September 1990 Internal T.I. 59139 F - Capital Gains Exemption for Qualified 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.

19(1)

September 21, 1990

Dear Sirs:

Re:  Definition of Qualified Small Business Corporation Share ("QSBCS") contained in subsection 110.6(1) of the Income Tax  Act (the "Act")

We apologize for the delay in responding to your letter of November 22, 1989 in which your requested a technical interpretation concerning the above definition in the following situation:

24(1)

Your indicate that you have been asked to determine whether a 24(1) share is a QSBCS and that in your view based upon the above facts the additional requirements of paragraph (d) of the QSBCS definition must be considered in making this determination. In particular you have asked for our views with regard to the following questions:

24(1)

The facts stated above would appear to relate to a situation involving actual taxpayers.  Confirmation as to the tax consequences of transactions involving such taxpayers are only given in advance income tax rulings requested in accordance with the guidelines contained in Information Circular 70-6R dated December 19, 1978.

However, in general terms, it is our opinion that a reference to subsection 186(4) in the QSBCS definition includes the application of subsection 186(2) of the Act.

In our view, where paragraph (d) of the QSBCS definition applies, that paragraph will require that the reference to "more than 50%" in clause (c)(ii)(B) of the QSBCS definition be read as a reference to "all or substantially all" in respect of other corporations connected (within the meaning of subsection 186(4) of the Act) with the corporation whose shares are under consideration, for the period of time specified in that paragraph.

It is the Department's position not to ignore upstream indebtedness between connected corporations in the determination of their qualification as small business corporations and whether the shares of the corporations are qualifying small business corporation shares.  With regard to the QSBCS definition, unless a particular inter-company receivable is an asset described in subparagraph (c)(i) of that definition, a determination would have to be made as to whether it was a "...bond, debenture, bill, note, mortgage, hypothec or similar obligation..." for the purposes of paragraph (c)(ii) of that definition.  Whether or not this factor, as well as, all other requirements of the small business corporation or QSBCS definitions are satisfied involve questions of fact which can only be decided after consideration of all the relevant facts of a particular situation.

It should be noted that the draft legislation issued by the Minister of Finance in July 1990 includes certain proposed amendments to paragraphs (c) and (d) of the QSBCS definition. In particular the amendments to the latter paragraph include a statement as to when one corporation is connected with another corporation for the purpose of that paragraph.

As explained in paragraph 24 of the Information Circular 70-6R, any written or verbal comments are not rulings and are not binding upon Revenue Canada, Taxation in respect of any taxpayers.

Yours truly,

for DirectorReorganization and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch