19 September 1990 External T.I. 901850 F - 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.

Dear Sirs:

Re: Paragraph 110.6(14)(a) of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter of August 2, 1990 wherein you requested our comments with respect to the following situation:

1.     Mr. X has owned all of the outstanding shares of Aco and Bco for more than 24 months.

2.     The fair market values of the shares of Aco and Bco are $90,000 and $10,000 respectively.

3.     Aco and Bco have amalgamated to form Cco in the manner described in subsection 87(1) of the Act.

4.     Pursuant to the amalgamation, Mr. X has received 90 and 10 shares of Cco in exchange for his shares of Aco and Bco respectively.

5.     The shares of Aco are qualified small business corporation shares ("QSBC shares") as defined in subsection 110.6(1) of the Act.

6.     The shares of Bco are not QSBC shares because they fail to meet the definition of QSBC shares found in subsection 110.6(1) of the Act.

7.     Mr. X acquired the shares of Aco prior to those of Bco.

8.     After the amalgamation, Mr. X sells one half of Cco shares to an arm's length party which results in Mr. X incurring a capital gain.

9.     Cco is a small business corporation as defined in subsection 248(1) of the Act.

In determining what portion of the capital gain resulting from the sale of the Cco shares would be eligible for the capital gains deduction under subsection 110.6(2.1) of the Act, you have provided the following alternatives:

1.       Since the value of the Cco shares is attributable to the Aco and Bco shares, the capital gain may be apportioned between the Aco and Bco shares on the basis of their respective fair market values.  Thus 90 percent of the capital gain is attributable to the Aco shares and, as the Aco shares are QSBC shares, it is this portion of the capital gain which is eligible for the deduction under subsection 110.6(1.1) of the Act.

2.       Paragraph 110.6(14)(a) of the Act indicates that identical shares are deemed to have been disposed of in the order the shares were acquired.  Since the Aco shares were the first acquired, paragraph 110.6(14)(a) of the Act would deem the Cco shares, which were substituted for the Aco shares, to be disposed of first.  Thus the entire capital gain would qualify for the deduction under subsection 110.6(1) of the Act because the Aco shares are QSBC shares.

Comment

It is our view that the shares are disposed of in the order that the predecessor corporations' shares were acquired.

The comment expressed is not an advance income tax ruling and is not considered binding on the Department, in respect of any taxpayer, in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978.

Yours truly,

for Director Reorganizations and Non-Resident DivisionRulings Directorate Legislative and IntergovernmentalAffairs Branch