11 January 1990 Ministerial Correspondence 59284 F - General Anti-avoidance Rule

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 11, 1990

Dear Sirs:

Re:  General Anti-Avoidance Rule ("GAAR")

We are writing in response to your letter of December 14, 1989 in which you requested our view as to whether GAAR would be applied in the following hypothetical situation which was outlined in your letter.

Situation

A shareholder who is an individual and a Canadian resident wishes to sell the shares of a corporation and to claim a capital gains deduction pursuant to subsection 110.6(2.1) of the Income Tax Act (the "Act"). The corporation is not a small business corporation within the meaning assigned by subsection 248(1) of the Act because it has cash and term deposits which are not used in its active business and which amount to more than 10% of the total fair market value of all of the corporation's assets. The corporation intends to use the cash and term deposits to pay some of its liabilities immediately prior to the sale of the shares by its shareholders.

Opinion

A taxpayer is entitled to claim a capital gains deduction pursuant to subsection 110.6(2.1) of the Act if the shares he disposes of are Qualified Small Business Corporation Shares ("QSBC shares") within the meaning assigned by subsection 110.6(1) of the Act at the time of disposition of the shares. One of the conditions for shares of a corporation to qualify as QSBC shares is that the corporation must be a small business corporation ("SBC") at the "determination time" referred to in the definition of QSBC shares.  Since it is critical that the shares of the corporation be QSBC shares at the time of disposition, the corporation must be a SBC at that time. There is no requirement that the corporation be a SBC prior to the time of disposition. Consequently, it is our view that the use of excess cash and term deposits to extinguish outstanding liabilities immediately before a disposition of the corporation's shares generally would not be considered a misuse or an abuse of the provisions of the Act. It is, therefore, our view that, generally, GAAR would not be applied as a result of such payment of liabilities, in and by itself.

We have only addressed one of the conditions that must be met for shares to qualify as QSBC shares, namely, that the corporation must be a SBC at the determination time. Other conditions referred to in the definition of QSBC shares in subsection 110.6(1) of the Act must also be met before the shares can be considered as QSBC shares.

The foregoing comments are an expression of our general opinion with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. 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