7 May 1991 Ruling 910653 F - Definition of "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.

Dear Sirs:

Re:  Paragraphs 110.6(1)(c) and 110.6(1)(d) of the Income Tax Act  (the "Act")

This is in reply to your letter of February 18, 1991, requesting our views on the effects of the recent technical amendments on the application of paragraphs 110.6(1)(c) and 110.6(1)(d) of the Act.

In your view the technical amendments impose a condition that all or substantially all of the assets of both Holdco and Opco must be assets described in subparagraphs 110.6(1)(c)(i), (ii) and (iii) of the definition of "qualified small business corporation share" under subsection 110.6(1) of the Act throughout the 24 months preceding the determination time in order to avoid the more stringent "all or substantially all" test under clause 110.6(1)(c)(ii)(B) of the definition.  Thus, in your opinion, in order to qualify, the assets of Opco must be all or substantially all assets described in 110.6(1)(c)(ii)(B) of the definition of "qualified small business corporation share" throughout the 24 month period ending at the determination time.

You ask for our views and to indicate whether or not the shares of Holdco would be "qualified small business corporation share(s)" under subsection 110.6(1) of the Act given the following hypothetical facts:

1.     All or substantially all of the assets of Holdco are active business assets or the shares of Opco throughout the 24 month period at the determination time;

2.     More than 50% of the fair market value of the assets of Opco are active business assets throughout the 24 month period ending at the determination time;

3.     Less than all or substantially all of the assets are active business assets for a period of time during the 24 month period ending at the determination time;

4.     All or substantially all of the assets of Opco are active business assets at the determination time.

Our Comments

Briefly, to qualify as a qualified small business corporation share ("QSBC share"), 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 addition, throughout the 24 month period preceding the disposition, the shares or obligations held in the connected corporations must not have been held by anyone other than the holding corporation.  Shares or debt held during this period must be shares or debt of a Canadian-controlled private corporation more than 50% of the fair market value of the assets or shares or debt of which was attributable to an active business.  It should be noted that while liabilities of a corporation are not relevant, if they are liabilities of a subsidiary they have an impact on the fair market value of the shares and thus on the small business corporation status.

Generally, if any corporation in a vertical chain cannot meet the active business asset test, then all or substantially all of the assets of the connected corporations must be used in an active business carried on in Canada throughout a 24 month period ending at the determination time.  Accordingly, in such instances paragraph (d) of the definition would impose a 90% test on the connected corporations during the holding period in place of the otherwise 50% test in paragraph (c) of the QSBC share definition in subsection 110.6(1) of the Act.  In addition, clause 110.6(1)(c)(ii)(B) of the Act requires a connected corporation to meet an active business asset test throughout a required holding period.

Where any particular corporation in a chain of corporations does not meet a 90% active business asset test, paragraph (d) of the definition requires that all other corporations connected with the particular corporation (within the meaning of subsection 186(4) of the Act) to meet a 90% active business asset test.  This special rule is intended to ensure that the 50% fair market value requirement cannot be circumvented through the stacking of several holding companies below the particular corporation.

The Explanatory Notes to Draft Income Tax Amendments issued by the Department of Finance state that paragraph (d) of the QSBC share definition restricts its application to those corporations connected with the particular corporation in which the particular corporation has a direct or indirect interest.  However, in the situation you describe, Holdco satisfies the test in the definition of QSBC share stated in 110.6(1)(c)(ii) as more than 50% of Opco's assets are used in an active business and more than 90% of Holdco's assets are represented by active business assets.  Since all or substantially all of the fair market value of the assets of Holdco are a combination of assets used principally in an active business and shares of a corporation described in subparagraph 110.6(1)(c)(ii)(B) there is no need to look at the remainder of paragraph (d) of the definition.  Accordingly, the Holdco shares would appear to be qualified small business corporation shares.

We trust our comments are of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch