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.
QUESTION I-25
CAPITAL GAINS DEDUCTION - QUALIFIED SMALL BUSINESS CORPORATION SHARES
Assume an individual incorporates a company, taking 1 share, and it remains inactive for some period, say 5 months. Throughout this time, the only asset is $1 cash and there are no liabilities. The individual transfers all of the assets used by him in a proprietorship to the company, taking back more common shares such that clause 110.6(14)(f)(ii)(A) would apply. The individual sells all his shares.
(a) Would the $1 meet the necessary active business asset test so as not to disqualify the shares as "qualified small business corporation shares"?
(b) If it could be shown that the corporation was done in contemplation of the incorporation of the proprietorship, would the incorporating share meet the requirements of 110.6(14)(f)(ii)(A)?
ANSWER
The intent of subsection 110.6(2.1) and paragraph 110.6(14)(f) is to permit a taxpayer to incorporate a sole proprietorship and avail himself of the enhanced capital gains deduction - The Department would not consider that the $1 cash, which had been received for the incorporating share, would disqualify the shares as "qualifying small business corporation shares" where it could be shown that the incorporation was done in contemplation of the incorporation of the proprietorship and the assets in question had never been other than nominal in value.
CTFNovember 1990R. MundellSection 23
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© Her Majesty the Queen in Right of Canada, 1990
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© Sa Majesté la Reine du Chef du Canada, 1990
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