11 March 1994 External T.I. 9330365 - 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.

Rulings Directorate
Correspondence Summary

Principal Issues:

Whether a disposition of shares of a qualified small business corporation entitles the vendor to the capital gains deduction where the corporation is wound-up immediately after the disposal.

Position TAKEN:

It is a question of fact. Subsection 245(2) may apply in certain circumstances.

Reasons FOR POSITION TAKEN:

Department's position stated at the 1986 Canadian Tax Foundation Conference and paragraph 25 of Information Circular 88-2.

FINANCE OPINION:

none

JURISPRUDENCE:

none

RCT PUBLICATIONS:

Information Circular 88-2 paragraph 25

HAA NUMBER:

5102-9-1

XXXXXXXXXX 5-933036
A. St-Amour

Attention: XXXXXXXXXX

March 11, 1994

Dear Sirs:

Object: Qualified Small Business Corporation Share

This is in response to your letter requesting a technical interpretation on whether a corporation will be disqualified as a qualified small business corporation in a situation where the vendor knows that immediately after the shares are sold the purchaser will proceed to liquidate the business and that it will cease to carry on an active business immediately after the sale.

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. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

Whether the share of a corporation is a qualified small business corporation share for the purposes of section 110.6 of the Act is a question of fact. It is also a question of fact whether a taxpayer would be entitled to the capital gains deduction after the disposition of such a share. As an example, in the 1986 Canadian Tax Foundation Conference Report, the Department confirmed that subsection 247(1) could apply to a transaction or series of transactions that were undertaken to circumvent specific provisions that provided that an individual who disposes of shares of a corporation would receive a dividend rather than proceeds of disposition. In this regard, subsection 247(1) applied to an individual who disposed of shares of a cash corporation that was immediately wound up therafter and the cash was used by the purchaser to pay the purchase price to the individual. Although subsection 247(1) was repealed as a consequence of the introduction of section 245, the Department has stated in paragraph 25 of Information Circular 88-2 dated October 21, 1988 that, subsection 245(2) will be applied if as a result of a transaction or a series of transactions a shareholder realizes a capital gain on the disposition of property and a transaction in the series is an avoidance transaction, when it is determined that the series of transactions was carried out to thwart the purpose of the provision in question.

As explained in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust the above comments will be of assistance to you. If you have any other questions do not hesitate to contact us.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate