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:
How a loan from a corporate partner to its partnership should be taken into consideration in determining whether the shares of the corporate partner qualify as QSBCS.
Position:
It may be possible to consider the loan to the partnership as a loan made proportionately to each of the partners. On that basis, if any other partner were not a small business corporation connected with the lending corporation, a portion of the loan, representing that other partner's interest in the partnership, would not qualify.
Reasons:
Generally a loan by a corporation to a partnership would not be an asset whose fair market value was attributable to assets "used principally in an active business carried on ... by the particular corporation." Thus, in order to be a qualifying asset, a loan would have to be "indebtedness of one or more small business corporations that are at that time connected with the particular corporation."
960752
XXXXXXXXXX J.D. Brooks
Attention: XXXXXXXXXX
May 2, 1996
Dear Sirs:
Re: Qualified Small Business Corporation Shares
This letter is in reply to your letter of February 20, 1996 in which you requested our opinion as to whether shares of a corporation owned by an individual in the hypothetical situation you described would qualify as qualified small business corporation shares ("QSBCS"s) to that individual within the meaning of that term in subsection 110.6(1) of the Income Tax Act (the "Act").
The fact situation which you set out is quite specific and it appears that it may relate to definite contemplated transactions. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. If you wish to obtain any binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling application should be submitted. We do, however, provide the following comments for your information.
Your concern focused on how a loan from a corporate partner to its partnership would be taken into consideration in determining whether the shares of the corporate partner qualify as QSBCSs to its shareholder.
The definition of QSBCS in subsection 110.6(1) and the definition of small business corporation in subsection 248(1) of the Act each refer to assets of a corporation that are used principally in an active business or assets that consist of shares of the capital stock or indebtedness of one or more small business corporations that are connected with the corporation. It is our current view, as expressed in an opinion (932524) issued on February 4, 1994, that a partner's advance to the partnership would not generally be an asset used in an active business unless that partner were in the business of advancing funds. Thus, in order for loans or advances of a corporation to qualify, they would have to be loans or advances to one or more small business corporations that are connected with the corporation.
The two definitions do not explicitly contemplate a loan by a corporation to a partnership. Nevertheless, for these purposes, it may be appropriate, in certain circumstances, to view a loan to a partnership as a loan to the partners. Since a loan, in order to qualify under the two definitions, must be receivable from a corporation that is connected with the lending corporation, one would have to consider the relationship of each partner to the lending partner. Provided that each other partner were a small business corporation connected with the lending corporation, the loan to the partnership may be a qualifying loan. If any other partner were not a small business corporation connected with the lending corporation, a portion of the loan, representing that other partner's interest in the partnership, would not qualify.
These comments are general in nature and do not specifically take into consideration the facts in the hypothetical situation which you outlined. As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, these comments are not binding on the Department.
We trust that our comments are of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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