21 September 1990 Administrative Letter 901486 F - 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.

Subject: Qualified Small Business Corporation Share

This is in reply to your memorandum of June 28, 1990, and further to a telephone conversation of August 22, 1990, (Tremblay/Fife) concerning the above "definition" in the situation where there is more than one holding company involved.

The facts as you have presented them are as follows: 

24(1)

24(1)

24(1)

You are concerned with the "stacking" of holding companies and seek clarification of the Department's interpretation of the capital gains deduction where indirect ownership exists through connected corporations (CCPC's). In your opinion, paragraph (d) of the definition of a "qualified small business corporation share" in paragraph 110.6(1) of the Act is triggered in Holdco situations to modify the rule in paragraph (c), and you wish to know if several Holdco's in vertical direct ownership still validates the application of paragraph (d). It is your view that regardless of the number of holdco's in the "stack", as long as Opco maintains the "90%" test status in the fair market value of active business assets throughout the 24 months holding period of the Holdco share, that any Holdco share in the "stack" will qualify if more than 50% of the fair market value of the share investment in the "stack" is held in Opco.

You are also seeking clarification of the share substitution rules in paragraphs (e) and (f) of the definition found in subsection 110.6(1) of the Act. As noted these paragraphs refer to one share being substituted for another share during the 24 month holding period. It is your view that the 24 month holding period must remain a complete 24 month for any substitution and that the intent in these paragraphs is to ensure that the tests set out in the "definitions" are met at all times throughout the 24 month period preceding the determination date or date of sale.

Schedule 1- Pre-Reorganization

24(1)

Schedule 2- Post-Reorganization 

24(1)

Our Comments

First, it is important to bear in mind 24(1)

Briefly, to qualify as a QSBC, at the determination time, a share must be one of a small business corporation as defined in subsection 248(1) of the Act. The share must also satisfy a holding period requirement as provided by paragraph (b) of the QSBC share definition in subsection 110.6(1) of the Act. In addition, the share or the shares of a connected corporation, must be a share of a corporation that meets an active business test as required by paragraph (c) of the QSBC share definition in subsection 110.6(1) of the Act. Furthermore, a more rigid active test, provided in paragraph (d) of the QSBC share definition in subsection 110.6(1) of the Act will apply with respect to certain corporations connected with the corporation under certain conditions.

In view of the above and on the assumption that, at the determination time 24(1)      Generally, several Holdcos in vertical direct ownership requires the application of the test provided in paragraph (c) of the QSBC definition in subsection 110.6(1) of the Act.  If any corporation in the chain cannot meet the test, then all or substantially all of the assets of the connected corporation must be used in an active business carried on in Canada throughout a 24 month period ending at the determination time.  Accordingly, in the case at hand, 24(1)

In answer to your second question, it is our view that paragraphs (e) and (f) of the definition of QSBC shares are intended to insure that the holding period and active business asset tests in the definition operate effectively where shares are received in substitution for other shares.  Those paragraphs provide that the original share must, throughout the part of the 24 month period preceding the determination time that is before the time of substitution (referred to as "the holding period"), not have been owned by a person or partnership other than the person or partnership described in paragraph (b) or subparagraph (c)(ii) of the definition.  The original share must also be a share of a corporation that meets an active business test throughout the holding period.  Where a share is substituted for another share it will meet the QSBC share definition only where the other share met the tests in paragraphs (b) and (c) throughout the part of the 24 month determination period ending at the time of substitution. Substituted property is defined in paragraph 248(5)(a) of the Act which deems the property effected by any such transaction to have been substituted for the original property. Thus, in our view, any number of substitutions are acceptable. Accordingly, it is possible to substitute or exchange shares as a result of corporate reorganizations and rollovers in any 24 month period.

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch