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:
Can the applicability of subsection 74.4(2) vary during a taxation year.
Position:
yes.
Reasons:
Whether or not a corporation qualifies as a small business corporation can change during the year such that the exemption in paragraph 74.4(2)(c) may not apply throughout the year.
960237
XXXXXXXXXX A. Seidel
(613) 957-8974
Attention: XXXXXXXXXX
February 7, 1996
Dear Sirs:
Re: Transfers and Loans to Corporations
This is in reply to your letter dated January 9, 1996, in which you requested our views with respect to the application of subsection 74.4(2) of the Income Tax Act (the "Act") in the situation where all of the requirements of subsection 74.4(2) of the Act have been met throughout a taxation year except that the corporation qualified as a small business corporation for part of the taxation year, then failed to qualify as a small business corporation for a part of the taxation year and then re-qualified as a small business corporation for the remainder of the taxation year and continued to qualify as a small business corporation thereafter. The expression "small business corporation" has the meaning assigned by subsection 248(1) of the Act.
The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments with respect to the application of subsection 74.4(2) of the Act which may be of some assistance.
In the situation where the purpose test in the preamble of subsection 74.4(2) of the Act is met and the conditions in paragraphs 74.4(2)(a) and (b) of the Act are satisfied, the exemption in paragraph 74.4(2)(c) of the Act is available to an individual for any period of time in a taxation year throughout which the corporation that received the loan or property is a small business corporation. Conversely, where a corporation ceased at any particular time to be a small business corporation, subsection 74.4(2) of the Act would become operative. Accordingly, it is our view that the applicability of subsection 74.4(2) of the Act could change from time to time depending on whether or not the corporation qualifies as a small business corporation for any particular period of time in the taxation year.
The amount of interest that an individual will be deemed to have received for any taxation year will be the amount, if any, by which the amount referred to in paragraph 74.4(2)(d) of the Act exceeds the aggregate of the amounts referred to in paragraphs 74.4(2)(e) and (f) of the Act. Paragraph 74.4(2)(d) of the Act refers to an amount of interest, at the prescribed rate, on the outstanding amount of the loan or transferred property for any period in the year throughout which the conditions in subparagraphs 74.4(2)(a), (b) and (c) of the Act are met. Therefore, the deemed interest would be attributed to the individual for any period commencing with the date on which the corporation ceases to be a small business corporation and ending with the date on which any one of the conditions in paragraphs 74.4(2)(a), (b) or (c) of the Act is no longer met.
These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2.
Yours truly,
for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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