24 January 1991 External T.I. 9022125 F - Qualified Small Business Corporation 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.

5-902212

Dear Sirs:

Re:  Request for Technical Interpretation Qualified Small Business Corporation Shares

We are writing in response to your letter of August 21, 1990 in which you requested our views on whether certain shares were "qualified small business corporation shares" as defined in subsection 110.6(1) of the Income Tax Ac (Canada) ("the Act")

The situation you described can be summarized as follows:

1.     From May 1986 to February 1989, Corporation X (a Canadian-controlled private corporation) had 300 common shares outstanding, owned as follows

Mr. A               50 Mrs. A               50 Mr. B                50 Mrs. B               50 Mr. C               50 Mrs. C           50Total               300

2.     None of the shareholders are related, except the spouses (i.e. Mr. and Mrs. A are related, Mr. and Mrs. B are related, and Mr. and Mrs. C are related.

3.     In March of 1989, Mr. A, Mrs. A, Mr. B and Mrs. B purchased the shares of Mr. C and Mrs. C.  As a result, each of Mr. A, Mrs. A, Mr.B and Mrs. B owned 75 shares of Corporation X.

4.     Immediately after the purchase of the corporation X shares by Mr. B and Mrs. B in March of 1989, Mr. B and Mrs. B each sold his or her 75 shares in Corporation X to Corporation Y, using the provisions of action 85 of the Act.  Consideration for the transfer consisted of shares of Corporation Y, (equal to 66 2/3% of the value of the shares of Corporation X transferred to Corporation Y), and assumption by Corporation Y of debt owing by Mr.B and Mrs. B to Mr. C and Mrs. C, (equal to 33 l/3% of the value of the shares of Corporation X transferred to Corporation Y).

5.     Corporation Y then transferred all of its shares of Corporation X to Corporation Z (a newly incorporated company), using the provisions of section 85 of the Act.  Consideration for the transfer consisted of shares of Corporation Z, (equal to 66 2/3% of the value of the shares of Corporation X transferred to Corporation Z), and assumption by Corporation Z of debt owing by Corporation Y to Mr. C and Mrs. C, (equal to 33 1/3% of the value of the shares of Corporation X transferred to Corporation Z).

6.     Mr. A and Mrs. A then each transferred his or her 75 shares in Corporation X to Corporation Z, using the provisions of section 85 of the Act.  Consideration for the transfer consisted of shares of Corporation Z, (equal to 66 2/3% of the value of the shares of Corporation X transferred to Corporation Z), and assumption by Corporation Z of debt owing by Mr. A and Mrs. A to Mr. C and Mrs. C, equal to 33 1/3% of the value of the shares of Corporation X transferred to Corporation Z).

7.     Corporation X is a "small business corporation", within the meaning assigned by subsection 248(1) of the Act throughout the 24 months prior to the disposition referred to in paragraph 8.  The only asset of Corporation Z at the time of the disposition referred to in paragraph 8 (the "Determination Time") is shares of Corporation X.  The only asset of Corporation Y at the Determination Time is shares of Corporation Z.

8.     In September of 1990, each of Mr. A and Mrs. A sells 3/4 of his or her shares in Corporation Z to an arm's-length purchaser at fair market value and each of Mr. B and Mrs. B sells 3/4 of his or her shares in Corporation Y to an arm's-length purchaser at fair market value.

You have asked for our views on whether the shares of corporation Z and the shares of Corporation Y qualify as qualified small business corporation shares at the Determination Time.

Our Comments

It appears that the situation described above involves a specific proposed transaction.  Assurance as to the tax consequences of specific proposed transactions will only be given in responses to a written request for an advance income tax ruling.  The procedures for requesting advance income tax rulings are set out in Information Circular 70-6R2.  We are, however, providing you with the following general comments.

During the 24 months preceding the Determination Time, the shares of Corporation Z and Corporation Y were shares of corporations whose fair market value was attributable to shares of one or more connected corporations i.e. Corporation X).  Therefore, in order to meet the criteria set out in clause (c)(ll)(A) of the definition of qualified small business corporation share" (the "Definition"), more than 50% of the shares of Corporation X owned by Corporation Z cannot have been owned by anyone other than Corporation Z or a person or partnership related to it during the 24 months preceding the Determination Time.

Since the shares of Corporation X were owned by Mr. C and Mrs. C, who were not related to Corporation Z or to corporation Y, and since Mr. A, Mrs. A, Mrs. B are not related to Corporation Z (as explained more fully below), the criteria set out in clause (c)(ii)(A) of the Definition are not met.

Further, even if the purchase from Mr. C and Mrs. C had happened more than 24 months prior to the Determination Time, the shares of Corporation Z and Corporation Y would still not be "qualified small business corporation shares" at the determination time because they could not meet the criteria outlined in paragraphs (e) and (f) of the Definition.  The shares of Corporation Z and Corporation Y are shares that were substituted for shares of Corporation X.  The shares of Corporation X were owned by someone who was not related to Corporation Z (Mr. and Mrs. A and Mr. and Mrs. B) and Corporation Y (Mr. and Mrs. A) during the 24 months preceding the Determination Time.

Mr. and Mrs. A and Mr. and Mrs. B are not related to Corporation Z,because the corporation is not controlled by one of them or by a related group of which they are members.  Nor are Mr. and Mrs. A related to Corporation Y (since they do not control the corporation, nor are they related to any member of the related group that does control the corporation).  Further, since all or substantially all of the consideration received by Mr. A and Mrs. A from Corporation Z in respect of the shares of Corporation X was not shares of Corporation Z (because 33 1/3% of the consideration consisted of assumption of debt owing by Mr. A and Mrs. A to Mr. C and Mrs. C.), Mr. A and Mrs. A are not deemed to be related to Corporation Z (i.e. the requirements of the deeming provision in paragraph 110.6(14)(e) are not met)

The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch