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:
1. Whether the assets of a partnership are looked at for the purpose of the asset test in the definitions of a qualified small business corporation share and small business corporation when determining whether the shares of the owner of real estate qualify.
2. Whether the real estate owned by a corporation is an asset used principally in an active business carried on primarily in Canada by a corporation related to it if the assets are used principally in an active business carried on primarily in Canada by a partnership and a related corporation.
Position:
1. Yes.
2. In the present situation, yes.
Reasons:
- Previous Departmental positions
- Question 58 - CTF 1993 Round Table
- Question 14 - CTF 1991 Round Table
5-970696
XXXXXXXXXX Sylvie Labarre
Attention: XXXXXXXXXX
June 5, 1997
Dear Sirs:
Re: Qualified small business corporation share
This is in reply to your letter dated March 12, 1997 wherein you requested a technical interpretation concerning the definition of "qualified small business corporation share" ("QSBCS") provided by subsection 110.6(1) of the Income Tax Act ("Act") and the definition of "small business corporation" provided by subsection 248(1) of the Act.
In your letter you have described a situation where real estate is owned by ACo, BCo and CCo, three Canadian-controlled private corporations which are respectively owned by A, B and C. A, B and C are related. ACo, BCo and CCo respectively own DCo, ECo and FCo and lease the real estate to DCo, ECo and FCo. DCo, ECo and FCo are equal partners in a partnership and each owns 1/3 of the outstanding shares of XCo. DCo, ECo and FCo sublease the real estate to the partnership and XCo. The partnership and XCo use the real estate in conducting their active business in Canada.
You request a confirmation that, for the purposes of subparagraph 110.6(1)(c)(i) of the definition of "QSBCS" and for the purposes of paragraph 248(1)(a) of the definition of a "small business corporation", the real estate assets owned by ACo, BCo and CCo are assets used principally in an active business carried on primarily in Canada by a corporation related to it.
As explained in Information Circular 70-6R3, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.
For the purpose of subparagraph 110.6(1)(c)(i) of the definition of QSBCS more than 50%, or for the purposes of subsection 248(1) of the definition of a "small business corporation" all or substantially all, of the assets of the corporation referred to therein must be attributable to assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it.
It is our view that where a corporation has a partnership interest as one of its assets, it is the underlying partnership assets (to the extent of the corporation's interest therein) that are used in determining whether all or substantially all of the corporation's assets are used in an active business. Provided that these assets are used in an active business carried on primarily in Canada by the partnership, they will qualify.
Accordingly, assets leased by the partnership for use in its active business carried on primarily in Canada will be considered to be used in an active business carried on primarily in Canada by the corporate partner. If these assets are owned by a corporation related to the corporate partner they will be considered to be "assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it", as described in subparagraph (c)(i) of the definition of QSBCS in subsection 110.6(1) of the Act.
We agree with your comments that, in the situation you described, the corporations are each related to one another and that, if the assets are used principally in an active business carried on primarily in Canada by the partnership and by XCo, the real estate assets are assets used principally in an active business carried on primarily in Canada by corporations related to the owners of the assets.
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
Marc Vanasse
Acting Section Chief
Resources, Partnerships and Trusts Section
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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