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:
Whether, where paragraph (c) of the definition of "qualified small business corporation share" is modified by paragraph (d) of the definition, the 90% asset test must be met by each subsidiary (i.e., connected corporation) of a subject corporation.
Position:
Although each subsidiary must meet the 90% asset test, the fact that a subsidiary does not meet the test may be of no consequence if the subject corporation can meet the 50% asset test of paragraph (c) without reference to the shares of the subsidiary which do not meet the 90% asset test.
Reasons:
Paragraph (c) of the definition of "qualified small business corporation share" only requires that the subject corporation meet a 50% asset test. The fact that shares it owns in a connected corporation do not meet the 90% asset test prescribed by paragraph (d) is irrelevant if its other qualifying assets represent more than 50% of the fair market value of all of its assets.
5-960896
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
June 21, 1996
Dear XXXXXXXXXX:
Re: Qualified Small Business Corporation Shares - Subsection 110.6(1) of the Income Tax Act
We are writing in reply to your letter of March 4, 1996, wherein you requested our comments regarding the application of paragraph (d) of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Income Tax Act (the "Act") in a particular situation.
In the situation you describe, the fair market value of the assets of Holdco is comprised of active business assets (30%), non-qualifying assets (25%), shares of subsidiary 1 (25%) and shares of subsidiary 2 (20%). Almost all of the assets of subsidiary 1 are active business assets (97%), except for 3% which are non-qualifying assets, and 67% of the assets of subsidiary 2 are active business assets, the remaining 33% being non-qualifying assets. You also indicate that both subsidiary corporations are wholly-owned subsidiaries of Holdco throughout the 24-month period and are connected to Holdco.
You inquire whether Holdco would meet the asset test in paragraph (c) of the definition of "qualified small business corporation share", as modified by paragraph (d) of the definition in subsection 110.6(1) of the Act. In your view, Holdco would meet the paragraph (c) test, as modified by paragraph (d), since 55% of the fair market value of its assets would be attributable to assets used principally in an active business and shares of a corporation connected with Holdco (i.e., subsidiary 1), 97% of the assets of which are attributable to assets used principally in an active business. You also opine that, the fact that subsidiary 2 would not meet the 90% asset test as required by paragraph (d) of the definition would be of no consequence, as Holdco would meet the 50% asset test of paragraph (c) without reference to the shares it holds in subsidiary 2.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.
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 "qualified small business corporation share") is, for any particular period of time in the 24-month period ending at the determination time, attributable to assets described in subparagraph (c)(i) or (c)(ii) or any combination thereof, for purposes of paragraph (c) of the definition of "qualified small business corporation share", the reference in clause (c)(ii)(B) to 50% must, for the particular period of time, be read as 90%.
In the situation described above, the 90% asset test of paragraph (d) of the definition of "qualified small business corporation share" would apply in respect of the subsidiaries, since only 75% of the fair market value of the assets of Holdco would be attributable to qualifying assets. Therefore, each of subsidiaries 1 and 2 would have to meet a 90% asset test, instead of a 50% asset test, under clause (c)(ii)(B) of the definition. Although subsidiary 2 would not meet the 90% asset test, given that only 67% of the fair market value of its assets are attributable to qualifying assets, this would be of no consequence to Holdco, since Holdco would meet the 50% asset test of paragraph (c) without reference to the shares it holds in subsidiary 2. Hence, we agree with your interpretation of the application of paragraphs (c) and (d) of the definition of "qualified small business corporation share" in the situation described above.
With respect to your query regarding a technical interpretation issued by the Department on June 28, 1994, as in the situation you describe, the two Parentcos in the examples considered in that letter met the 50% asset test of paragraph (c) of the definition of "qualified small business corporation share" without reference to the shares of subsidiary 2. Accordingly, subsidiary 2's failure to meet the 90% asset test was irrelevant.
You should note that, unless Holdco met the 90% asset test at the determination time, its shares would not qualify as "qualified small business corporation share", since Holdco would not meet the definition of "small business corporation" in subsection 248(1) of the Act.
We trust that these comments will be 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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