28 June 1994 External T.I. 9330615 - DEFINITION OF QSBCS

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.

5-933061
XXXXXXXXXXC. Chouinard

Attention: XXXXXXXXXX

June 28, 1994

Dear Sirs:

Re: Capital Gains Exemption - Paragraph 110.6(1)(c) of the Income Tax Act

We are writing in reply to your letter of October 21, 1993 wherein you requested our comments on the application of the above-captioned provision of the Income Tax Act (the "Act") in the two following situations:

1)The fair market value of the assets of Parentco 1 comprise active business assets (40%), shares of subsidiary 1 (12%), shares of subsidiary 2 (1%) and investments (47%). All of the assets of subsidiary 1 are active business assets and 75% of the assets of subsidiary 2 are active business assets, the other 25% being investments.

2)The fair market value of the assets of Parentco 2 comprise shares of subsidiary 1 (52%), shares of subsidiary 2 (1%) and investments (47%). All of the assets of subsidiary 1, save 4%, are active business assets, whereas all of the assets of subsidiary 2 are investments.

All corporations are Canadian-controlled private corporations and the above-mentioned assets have been owned by the respective corporations throughout the preceding twenty-four month period.

You ask whether in the above two situations, the shares of Parentco would qualify as "qualified small business corporation shares" ("QSBCS") within the meaning of subsection 110.6(1) of the Act. In your view, since less than 50% of the fair market value of the assets of Parentco 1 and 2 are attributable to assets used in an active business, the shares of Parentco 1 and 2 will qualify as QSBCS only if each of the subsidiaries of Parentco 1 and 2 meet the 90% asset test of paragraph 110.6(1)(d) of the definition of "qualified small business corporation share".

Our Comments

Your request for a technical interpretation appears to relate to a situation which arose in respect of a specific taxpayer. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, a request for a written opinion on a completed transaction is generally considered by the taxpayer's local district office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following comments.

Where a corporation is part of a vertical chain and less than 90% of the fair market value of the assets of that corporation or any corporation connected thereto (within the meaning of paragraph (d) of the definition of QSBCS) are attributable to assets described in subparagraph (c)(i) or (c)(ii) or any combination thereof, for purposes of paragraph (c) of the definition of QSBCS, the reference in clause (c)(ii)(B) to 50% must be read as 90%.

The 90% test of paragraph (d) of the definition of QSBCS will apply in the two situations you have described since, in both cases, Parentco fails to meet the 90% test. Therefore, in order to determine whether the shares of Parentco are QSBCS, the reference in clause (c)(ii)(B) to 50% must be read as 90%. Thus, the shares of Parentco will qualify as QSBCS if more than 50% of the assets of Parentco are attributable to:

(i)assets used principally in an active business carried on primarily in Canada;

(ii)shares of the capital stock or indebtedness of one or more corporations that are connected to Parentco......and that are Canadian-controlled private corporations more than 90% of the fair market value of the assets of which is attributable to assets described in (iii), or

(iii) assets described in either (i) or (ii).

Accordingly, in the first situation, the shares of Parentco would qualify as QSBCS since more than 50% of the fair market value of its assets are attributable to assets described in (iii) above, i.e., 40% is attributable to active business assets and 12% is attributable to shares of a corporation (subsidiary 1), more than 90% of the fair market value of the assets of which is attributable to active business assets. The shares of Parentco 2 would qualify as QSBCS for similar reasons, i.e., 52% of the fair market value of its assets are attributable to shares of a corporation (subsidiary 1), more than 90% of the fair market value of the assets of which is attributable to active business assets. In both of these examples, subsidiary 2's failure to meet the 90% test is irrelevant as Parentco meets the 50% test required in the preamble in paragraph (c) based on its own active business assets and the shares of subsidiary 1.

Unless as otherwise stated, all references to statute are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch