10 January 1992 Income Tax Severed Letter 9122157 - Definition of 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: DEFINITION OF QSBCS Section(s): 110.6(1)]

ROUND TABLE - CGA - JANUARY 10, 1992

Officer: P Diguer
File: 7-912215

QUESTION #10

The draft amendments released July 13, 1990 propose amending some elements of the definition of a "qualified small business corporation share" in section 110.6 of the Act. The amendments to the definition apply to dispositions of shares after June 17, 1987. One of the amendments provides, among other things, that the asset test will be met if the assets are used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it. In the case of a building owned by a corporation, 60% of which is leased to third parties, it would appear that the total value of the building could not be considered an eligible element. The amendment is to apply retroactively and could be unfair to taxpayers who had previously interpreted the Act otherwise (for example, according to the percentage of the eligible part).

What is the Department's policy on this matter?

ANSWER

The draft amendment to which you refer (Bill C-18) became law on December 17, 1991. The legislation clarifies that the building used in your example would not qualify as an asset used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it, for the purposes of subparagraph (c)(i) of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Act. It should be noted that even before the coming into force of the above-mentioned amendments, generally speaking, the Department considered that an asset was used in a business if its primary or principal use (i.e. more than 50% of its use) was in respect of that business (IT-488R, paragraph 5). We are therefore of the opinion that the building would have been ineligible even before Bill C-18 came into force.