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.
Dear Sirs:
This is in reply to your letter of August 20, 1990 concerning the definition of the term "small business corporation", as defined in subsection 248(1) of the Income Tax Act (the Act).
You described a hypothetical situation where a "Canadian Controlled Corporation" carrying on a manufacturing operation has a wholly owned subsidiary in the United States which carries on similar manufacturing activities. The fair market value of the assets of the Canadian company is substantial with the shares of the U.S. subsidiary accounting for more than 10% of the total value but less than 50%. All assets are used in an active business.
It is your view that, for purposes of the definition of small business corporation in subsection 248(1) of the Act, we should look through the shares of the subsidiary to the underlying assets in the same way we look through a partnership interest. This would enable the company to qualify as a small business corporation.
Paragraph 6 of IT-486R set out the Department's position regarding the use of underlying partnership assets where a corporation has a partnership interest as one of its assets. This position is consistent with the reasoning adopted by the Federal Court Trail Division in Norco Development Ltd. v. The Queen, [[1985] 1 C.T.C. 130] 85 DTC 5213. At page 5217 Judge McNair stated:
"In my opinion, the partnership, Noort Development is not a legal entity. Section 96 of the Act provides rules for the computation of partnership income. The partnership is envisaged as a separate person solely for the public of measuring the flow of income of the individual partners, which is then taxed in their hands."
This reasoning however, would not apply where a corporation has shares of a subsidiary as one of its assets. A subsidiary corporation is considered a legal entity, separate and distinct from the parent corporation.
Thus in your hypothetical situation it is the shares (and not the underlying assets) of the subsidiary which would be taken into consideration in determining whether the all or substantially all test in the definition of small business corporation in subsection 248(1) of the Act is met.
We trust this will be of assistance to you.
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