24 November 1997 External T.I. 9729105 - QUALIFIED SMALL BUSINESS CORPORATION SHARE

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:

Is a loan from a corporation to an individual who uses the funds in a connected corporation an asset used in an active business for the QSBCS definition?

Position:

No

Reasons:

Indebtness must be to a corporation that was connected (within the meaning of 186(4)

			972910
XXXXXXXXXX	C. Tremblay

Attention : XXXXXXXXXX

November 24, 1997

Dear Sirs:

Re: Qualified Small Business Corporation Share (“QSBCS”)

This is in reply to your letters of October 31, 1997, and October 21, 1997, and further to our letter of September 30, 1997,..

You question whether a loan advanced by a corporation to an individual related to the shareholders of the lending corporation who then uses the funds to refinance personal property used in a connected corporation is an asset used principally in an active business carried on primarily in Canada by the lending corporation.

Since the indebtedness must be to one or more corporations that were connected (within the meaning of subsection 186(4) of the Act on the assumption that each of the other corporations was a “payer corporation” within the meaning of that subsection), in our view, a loan from a corporation to an individual would not satisfy the SBC requirement, regardless of how the individual later uses the funds. Accordingly, if more than 50% of the assets of the lending corporation are attributable to such indebtness or other assets not used in an active corporation, the shares would not meet the QSBCS definition.

Further, whether a corporation is holding indebtedness in a small business corporation (a “SBC”) that is at the time connected with the particular corporation and whether that corporation, or a corporation connected with it, is carrying on an active business are questions of fact.

We trust our comments will be of assistance to you

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and

Interpretations. Directorate