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.
|
J. Humphrey |
XXXXXXXXXX |
(613)952-0245 |
Attention: XXXXXXXXXX
Dear Sir:
This is in reply to your letter of March 25, 1993 and telephone conversation (XXXXXXXXXX/Humphrey) of August 4, 1993 regarding whether certain shares owned by Mr. A in A Co. would be qualified small business corporation shares ("QSBCSs") within the meaning of Section 110.6(1) of the Income Tax Act (the "Act").
The hypothetical scenario is as follows:
1. Mr. A owns all of the shares of A Co. and B Co.
2. 100% of the fair market value of the assets of B Co. is attributable to assets used principally in an active business carried on primarily in Canada.
3.a) 40% of the fair market value of the assets of A Co. is attributable to assets used principally in an active business carried on primarily in Canada.
b) 60% of the fair market value of the assets of A Co. consists of a note receivable from B Co.
Our Comments:
As the situation in your letter appears to involve an actual proposed transaction involving a specific taxpayer, confirmation of the transaction's income tax consequences can only be given in the context of an advance income tax ruling. We do however, offer the following general comments relating to your queries. In order for shares of a corporation to qualify as QSBCSs, the corporation must be a small business corporation ("SBC") within the meaning of subsection 248(1) of the Act which requires, among other things, that 90% of the fair market value of the assets of the corporation be attributable to an active business. The assets must be either (1) assets which are used principally in an active business carried on primarily in Canada by the corporation (or by a corporation related to it), or (2) shares or indebtedness of one or more SBC's that are connected (within the meaning of subsection 186(4) of the Act on the assumption that the SBC's are "payer corporations" within the meaning of that subsection) with the corporation.
In this instance, in order for the assets of A Co. to meet the 90% threshold, the promissory note owed from B Co. to A Co. would have to be from a connected corporation within the meaning of subsection 186(4) of the Act. Since there are no shares of B Co. owned by A Co., the requirements of paragraph 186(4)(b) are not met. However, it is the Department's view that, in determining whether one corporation is connected with another within the meaning of paragraph 186(4)(a) of the Act for the purposes of subsection 248(1) of the Act, the provisions of subsection 186(2) of the Act are applicable. Since Mr. A owns all of the shares of both A Co. and B Co., then B Co. would be connected to A Co. within the meaning of subsection 186(2) of the Act on the basis that more than 50% of B Co.'s shares belong to Mr. A, with whom A Co. does not deal at arm's length. That being the case, in our view, 100% of the fair market value of A Co. would be qualifying assets for purposes of the SBC definition in subsection 248(1) of the Act and the shares, assuming all of the other criteria are met, could qualify as QSBCSs.
These comments represent an expression of opinion and, as stated in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.
We trust that these comments will be of assistance.
Yours sincerely,
for DirectorBusiness and General Division Rulings and Intergovernmental Affairs Branch
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