8 December 1992 External T.I. 922739A 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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Paragraph 110.6(1)(d) of the Income Tax Act (the Act)

This is in reply to your letter dated September 15, 1992, requesting that we reexamine a previous interpretation obtained from our office regarding the definition of qualified small business corporation share for purposes of the capital gains deduction.

In particular you asked that we examine the two following examples:

Example One

FMV of Assets

Corporation X -$49 active business assets -$51 shares of Corporation Y (51%)

Corporation Y -$61 active business assets -$27 shares of Corporation Z (27%) -$12 inactive assets

Corporation Z -$57 active business assets -$43 inactive assets

Example Two

FMV of Assets

Mr. X owns 100% of Company A

Company A:

Company A owns 100% of - 100% Company B shares Company B

Company B:

Company B owns 20% of - 50% Company C shares Company C - 49% ineligible investments - 1% active business assets

Company C:

- 51% active business assets - 49% ineligible assets

It is your opinion that neither of these two examples would meet the definition of a qualified small business corporation share due to the interaction of subparagraphs (c) and (d) of the definition.

Our Comments:

Example One

The test found in paragraph (d) of the QSBCS definition should be applied only to corporation X in the first example and to corporations connected to it. Corporation X's assets are 90% attributed to a combination of assets described in subparagraph (c)(i) and clause (c)(ii)(B). As corporation Y meets the 50% test based on subparagraph (c)(i) alone, and as that paragraph is disjunctive with subparagraph (c)(ii), it is not necessary to consider the impact of Corporation Z not meeting the 90% test. Accordingly, we confirm the answer given in our letter #912854 with respect to this hypothetical example.

Example Two

Company A, if it meets the qualified small business corporation share definition at all, depends on subparagraph (c)(ii) and its holdings of Corporation B shares to do so. Corporation B, in turn, depends on Corporation C. As Corporation C meets the 50% test but does not meet the 90% test, it is necessary for the connected corporations (which for purposes of paragraph (d) of the definitions, would be both Corporations A and B) to meet the 90% test. As Corporation B does not meet the 90% test, its shares will be of no assistance to Corporation A in meeting the definition and the shares of Corporation A will not qualify in the hands of Mr. X.

Generally, where there are more than two corporations in a chain, the definition allows for only one corporation in the chain to have less than 90% and more than 50% of the fmv of its assets in active business assets or shares and debt of connected corporations. The major exception to this generality arises with corporations which meet the 50% test based on their own active business assets, thus avoiding the need to consider whether their subsidiaries meet an active business test. Of course, all corporations in a chain, above a corporation with 50% active business assets would be required to meet the 90% test.

We trust these comments will be of assistance to you.

Yours truly,

E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch