13 February 1996 External T.I. 9522675 - QSBCS - PUBLIC OFFERING IN U.S.

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.

Principal Issues:

Consequences to QSBC shares after an initial public offering in the U.S.

Position TAKEN:

1. Section 48.1 election is not available.

2. Before 1996, shares may qualify depending on control. After 1995, the shares will cease to qualify regardless of control as corporation does not qualify as a CCPC.

Reasons FOR POSITION TAKEN:

1. This provision is not available when corporation is going public on a foreign stock exchange.

2. Subsection 125(7) defines a CCPC as a corporation which is not controlled by non-resident persons, one or more public corporations or a combination thereof. This provision was amended for years commencing after 1995 to exclude corporations which have any shares listed on any Canadian or foreign stock exchange.

		952267
XXXXXXXXXX		L. Barrows

Attention: XXXXXXXXXX

February 13, 1996

Dear XXXXXXXXXX:

Re: Qualified Small Business Corporation Shares

This is in reply to your letter of August 17, 1995, wherein you requested our views on certain tax issues relating to a hypothetical situation involving the public offering of qualified small business corporation ("QSBC") shares.

The facts of the situation are that Company X is a Canadian-controlled private corporation ("CCPC") the shares of which qualify as QSBC shares as defined under subsection 110.6(1) of the Income Tax Act (the "Act"). In 1995, the company will make an initial public offering on a U.S. stock exchange after which time the shares of Company X will no longer qualify as QSBC shares. To accomplish this offering, the following transactions will occur in respect of existing share holdings:

1. There will be a primary offering of shares from treasury.

2. The existing shareholders will sell their shares through a secondary offering.

3.The date of settlement for the secondary offering will occur before the date of settlement for the primary offering.

It would appear that the situation outlined in your letter may relate to an actual fact situation. If this is the case and the transaction is currently being proposed, please be advised that it is not the Department's practice to give written, binding opinions. Assurance as to the tax consequences relating to a proposed transaction will only be given in the context of an advance income tax ruling. The procedures for requesting an advance tax ruling are outlined in Information Circular 70-6R2. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. We can, however, offer the following general comments relating to the tax issues you have raised.

Comments

Section 48.1 of the Act allows a taxpayer who is an individual to elect to dispose of QSBC shares immediately prior to the corporation going public with a listing of its shares on a prescribed stock exchange in Canada. As discussed in the 1991 Budget Supplementary Information, the provision is intended to ensure that individuals do not lose their entitlement to the enhanced capital gains exemption in cases where the shareholder finds it unacceptable to dispose of the shares prior to the initial public offering due to the shareholder's desire to continue to participate in the growth of the corporation after it has gone public. An individual may specify any amount of proceeds between the adjusted cost base and the fair market value and as a result can match accrued gains to the available capital gains exemption. Where an election is made, the individual will be deemed to have reacquired the shares immediately after the election at the specified amount. However, we agree with your comments that an election under section 48.1 is not available in situations where a corporation is going public on a foreign stock exchange.

Subsection 125(7) of the Act defines a CCPC for the purposes of the small business deduction provided by section 125 basically as a Canadian corporation that is a private corporation. By virtue of subsection 248(1), this definition is the same for all purposes of the Act. To qualify as a CCPC, the corporation must not be "controlled directly or indirectly in any manner whatever" by one or more non-resident persons, one or more public corporations or any combination thereof. Canadian corporation and private corporation are defined under subsection 89(1) and are applicable for all purposes of the Act by virtue of subsection 248(1). The specific terms of any agreement with respect to an initial public offering are a question of fact. Generally, however, these terms will be the basis of determining when there has been a change in control of a corporation. In this regard, paragraph 5 of Interpretation Bulletin IT-458R states that a corporation can become or cease to become a CCPC if control changes or the status of the parties who control the corporation changes. Further, paragraph 6 of IT-458R states that where a person has a right under contract, in equity or otherwise to acquire shares in a corporation or control voting rights of shares in a corporation, that person is deemed to have the same position in relation to control of the corporation as if that person owned the shares. Therefore, while you may be correct in your view that shares listed on the U.S. stock exchange may not at this time disqualify Company X as a CCPC, the status of control pursuant to the public offering agreement should also be considered. As you also point out, after 1995, the amendment to the definition of CCPC under subsection 125(7) of the Act will mean that Company X will, without question of control, cease to qualify as a CCPC once any shares are listed on any Canadian or foreign stock exchange.

Interpretation Bulletin IT-133 discusses the timing of the disposition of shares in stock exchange transactions and states that, generally, there is a disposition and acquisition of shares on the settlement date which is usually two or three days subsequent to the trade date at which time the vendor is required to deliver the share certificates and the purchaser is required to make the payment therefor. It also indicates that the settlement date is used for determination of disposition since subparagraph 54(c)(i) of the Act defines disposition to be any transaction or event entitling a taxpayer to proceeds of disposition. Accordingly, we agree with your view that the ordering of the settlement dates in respect of the sales of shares is of importance in this situation.

We trust these comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch