30 September 1997 External T.I. 9718305 - QUALIFIED SMALL BUSINESS SHARES

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) Are loans to related individual and to related corporations assets used principally in an active business carried on in Canada ?

2) Are the companies connected for the purposes of subsection 186(4) of the Act?

Position:

1) Not enough information however it doesn't appear that the loans qualify
2) No

Reasons:

1) loan to individual - question of fact whether in the ordinary course of business
2) related co not controlled or co does not own 10% of related co

                                     	971830
XXXXXXXXXX						C. Tremblay

Attention: XXXXXXXXXX

September 30, 1997

Dear Sirs:

Re: Qualified Small Business Corporation Shares ("QSBCS")

This is in reply to your letter of July 7, 1997, wherein you request whether monies lent by a corporation to a related individual or to a related corporation is an asset used principally in an active business carried on primarily in Canada by the corporation.

The situation that is described appears to involve a series of actual completed transactions involving specific taxpayers; consequently, your questions should be directed to your District Services Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

In order for the shares of a corporation to qualify as QSBCSs, the corporation must be a small business corporation ("SBC") at the determination time and this necessitates, inter alia, the corporation meeting a test (the "90% test") regarding the current use of its assets. In order to meet this test, all or substantially all of the fair market value of the corporation's assets must be either (1) assets which are used principally in an active business carried on primarily in Canada by the corporation (or by a corporation related to it), or (2) shares or indebtedness of one or more SBCs that are connected (within the meaning of subsection 186(4) of the Act on the assumption that the SBCs are "payer corporations") with the corporation.

Where a corporation is not using its assets in an active business sufficient to enable it to qualify on its own merits as an SBC but holds shares or indebtedness in another corporation which is connected with it, both of the corporations must qualify as SBCs at the determination time in order for the shares to qualify as QSBCSs. In your example, it is a question of fact whether any of the corporations mentioned is carrying on an active business before the loan transactions. Further, it doesn't appear that the related corporations are connected for the purposes of 186(4) of the Act. Accordingly, if the loan doesn't qualify because the corporations are not connected and do not meet the definition of a SBC, the loan would qualify as an asset used in an active business only if the lending corporation was in the business of lending money.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch