14 February 1990 Income Tax Severed Letter AC59203 - Capital Gains Exemption - 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.

19(1) 5-9203

M. Vallée
(613) 957-2093

February 14, 1990

Dear Sirs:

Re: Technical Interpretation
Qualified Small Business corporation Share

This is in reply to your letter dated November 27, 1989 whereby you requested our opinion with respect to a hypothetical situation which you described as follows:

• 1. Father controls OP Co. which carries on an active business in Canada.
• 2. Father also controls R Co. which has borrowed funds from OP Co. to purchase real estate which is leased to Op Co. and used in its active business.
• 3. The loan of OP Co. to R Co. constitutes 25% of the value of OP Co.'s assets.

We have assumed, for purposes of our response, that Op Co. is not in the business of lending money.

You requested our opinion as to whether the loan made by OP Co. to R Co. could be considered to be as an asset ""used in an active business carried on primarily in Canada by the corporation or a corporation related to it"" for purposes of subparagraph (c)(i) of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Income Tax Act (the "Act"), the (the "Definition").

Our Comments

We are of the opinion that the loan from Op Co. to R Co. would not be an asset used in an active business carried on by Opco. or R Co., and would therefore not be an asset described in subparagraph (c)(i) of the Definition.

However, it is our view that R Co. would be connected with Op Co. within the meaning of subsection 186(4) of the Act. Accordingly, the loan could be an asset described in subparagraph (c)(ii) of the Definition provided that the loan:

• (a) constituted a "bond, debenture, bill, note, mortgage, hypothec or similar obligation" (a "Qualifying Obligation"); and
• (b) satisfied the requirements in clauses (c)(ii)(A) and (B) of the Definition as modified, if necessary, by paragraph (d) of the Definition.

It is our view that an unsecured intercompany loan that is not evidenced in writing does not constitute a Qualifying Obligation.

Whether or not a loan satisfied the requirements referred to in (a) and (b), above, could only be determined after a review of all the relevant circumstances.

In accordance with the guidelines described in paragraph 24 of information Circular 70-6R dated December 18, 1978, the comments expressed in this letter do not constitute advance income tax rulings and consequently are not binding on the Department.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

Document Disclosed Pursuant to the Access to Information Act Document Divulgué en vertu de la loi sur l'accès à l'informationLANGIND E DOCNUM AC59207 REPLACES TYPEKEY R AUTHORDV LEGS AUTHOR PLEE DESCKEY 5 RATEKEY 1 REFDATE 900205 ETADYEAR ETADSORT ADMINACC LEGS ACCESSLV LEGS99 SUBJECT Loss on disposition of a property which is a loan SECTION ITA-18(13) SECTION SECTION SECTION SECTION $$$$

• 5- 9207

19(1) Peter Lee
(613) 957-2745

February 5, 1990

Dear Sirs:

Re: Subsection 18(13) of the Income Tax Act (the "Act") Loss on Disposition of a Property Which is a Loan

We are writing in reply to your letter of December 4, 1989, wherein you requested our opinion as to whether subsection 18(13) of the Act would deny a loss on disposition of a property which is a loan, only to the extent that the loss exceeds any paragraph 20(1)(1) reserve previously claimed.

In a case where the conditions for its application are satisfied, it is our opinion that subsection 18(13) of the Act would deny the full amount of a loss on disposition of a property which is a loan.

This interpretation would result in the same aggregate net income inclusion or deduction, in respect of the year of disposition of the loan and prior years, for taxpayers undertaking "superficial loss" transactions subject to subsection 18(13) of the Act, whether or not they have ever claimed a paragraph 20(1)(1) reserve in respect of the disposed loan.

A taxpayer who has claimed a paragraph 20(1)(1) reserve on a doubtful loan in a year would add the reserve amount to his income in the following year under paragraph 12(1)(d) of the Act and would realize a loss on the doubtful loan only in the year of disposition of the loan. If the disposition is subject to subsection 18(13) of the Act, which is similar to the "superficial loss" rule in paragraph 54(i) of the Act relating to capital properties, the taxpayer would be denied recognition of such loss realization for tax purposes. Subsection 18(13) provides that any denied loss would be added in computing the cost of the loan to the purchaser, including a related non-resident purchaser carrying on business in Canada.

Our opinion is provided in accordance with the practice described in paragraph 24 of Information Circular 70-6R.

Yours truly,

J.C. Clark
for Director
Financial Industries Division
Rulings Directorate

Document Disclosed Pursuant to the Access to Information Act Document Divulgué en vertu de la loi sur l'accès à l'information