17 July 1991 Ministerial Correspondence 911104 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.

July 10, 1991

Dear Sirs:

Re: Qualified Small Business Corporation Share (QSBCS)

This is in reply to your letter of April 18, 1991 in which you ask that we reconsider our reply of March 28, 1991.

In our reply we stated the view that the intercompany debt in your example owed by Parent to Opco would not qualify under subparagraph (c)(ii) of the definition of a QSBCS. We affirm that view. In our opinion in order for the loan held by Opco to qualify in (c)(ii) of the QSBCS definition it must be a loan issued by a connected corporation [within the meaning of subsection 186(4) on the assumption that Parent was at that time a "payer corporation" within the meaning of subsection 186(4)]. To read subparagraph (c)(ii) otherwise would lead to anomalous results. For example if we eliminate the active business assets from Opco's total assets, leaving only intercompany debt and third party debt, under your reasoning Parent's shares could appear to qualify as QSBCS's. (Parent qualifies if Opco qualifies which qualifies if Parent qualifies, etc.). This clearly was not intended. We therefore reiterate that only downstream loans made by Opco would qualify under subparagraph (c)(ii).  However, we disagree with your conclusion that this position means inter-company debt between sister companies would never qualify. Such debt could very well qualify in appropriate circumstances.

With respect to the penultimate paragraph of your April 18, 1991 letter, in our view the 50% test is not satisfied based on subparagraph (c)(i) of the definition. Opco has a separate legal existence and it is not possible to view the active business assets of Opco as assets of the Parent being used by a related corporation, merely because Parent owns 100% of Opco. This contrasts with the situation where Parent actually owns assets (for example, land and building) which are leased to Opco for use in Opco's active business. We trust that our further comments will prove helpful.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental     Affairs Branch