19 March 1992 Income Tax Severed Letter 9201165 - QSBC 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.

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: QSBC SHARE Section(s): 110.6(1), 251(2)(a)]

XXX 920116 M.P. Sarazin (613) 957-2118

Attention: XXX

March 19, 1992

Dear Sirs:

This is in reply to your letter dated January 6, 1992 wherein you requested technical interpretations regarding the application of sections 110.6 and 251 of the Income Tax Act (Canada) (the "Act") to the following situations.

You would like to know whether spouses who are living separate and apart by reason of a breakdown of their marriage would be considered related persons for the purposes of paragraph 251(2)(a) of the Act.

In a situation where an individual acquires shares in a qualified small business corporation, as defined in subsection 110.6(1) of the Act, from his or her spouse after they are living separate and apart by reason of a breakdown of their marriage, you would like to know whether or not the shares would satisfy the condition set out in paragraph (b) of the definition of "qualified small business corporation share" in subsection 110.6(1) (hereinafter referred to as the "Condition") that they be owned by the individual or a person related to the individual throughout the 24 months immediately preceding the determination time in each of the following situations:

• (a) where the individual and his or her spouse have owned the shares for at least 24 months, in aggregate, and the individual sells the shares to an arm's length third party while they are separated but prior to owning them personally for 24 months;
• (b) where the individual and his or her spouse have owned the shares for at least 24 months, in aggregate, and the individual sells the shares to an arm's length third party after they are divorced but prior to owning them personally for 24 months; and
• (c) where the individual acquires the shares after the divorce and sells them to an arm's length third party prior to owning the shares for 24 months.

In (a) and (b) above, the individual and his or her spouse were married throughout that portion of the 24 month period preceding the determination time that the shares of the corporation were owned by the spouse.

Comments

Pursuant to paragraph 251(6)(b) of the Act, persons are connected by marriage if one is married to the other. Consequently, we are of the view that spouses, even though they are living separate and apart by reason of a breakdown of their marriage, would continue to be connected by marriage and, as such, they would continue to be related persons for purposes of the Act until a divorce decree is issued by the courts.

In order to qualify as a qualified small business corporation share, the share must have been owned by the taxpayer or a person or partnership related to the taxpayer throughout the 24 months preceding the determination time. It is our general view that where the share was owned by another person during part of the 24 month period preceding the determination time and that person was related to the particular taxpayer during the period that the share was owned by that person then the Condition would be satisfied even though the taxpayer and the person may not be related at the determination time. Therefore, we would conclude that the shares would qualify as qualified small business corporation shares in the situations described in (a) and (b) above.

In the situation described in (c) above, we are of the view that since the shares were acquired by the individual after the date that the divorce decree is issued by the court when the individual and his or her former spouse would no longer be related then the Condition wouldn't be satisfied and the shares would not qualify as qualified small business corporation shares at the determination time.

The foregoing comments are provided in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.

Yours truly,

for Director
Reorganizations and Foreign division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch