7 June 1991 Income Tax Severed Letter - 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.

Dear Sirs:

Re: Paragraphs 110.6(1)(c) and 110.6(1)(d) of the Income Tax Act (the "Act")

This is in reply to your letter of March 26, 1991, representing our views on the following hypothetical situation with considerations to the effects of the recent technical amendments on the application of paragraphs 110.6(1)(c) and 110.6(1)(d) of the Act.

The facts as given are as follows:

• 1. XXX
• 2. XXX
• 3. XXX
• 4. XXX
• 5. XXX
• 6. XXX
• 7. XXX

You ask for our views and to indicate whether or not the shares of Mr A's A. Limited common shares would be "qualified small business corporation share(s)" under subsection 110.6(1) of the Act.

Although you have asked for a technical interpretation based on a hypothetical situation, this appears to be an actual fact situation. Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. However, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation to the appropriate District Office for their comments.

We are, however, prepared to provide some general comments.

Our Comments

Briefly, to qualify as a qualified small business corporation share ("QSBC share"), at the determination time, a share must be one of a small business corporation as defined in subsection 248(1) of the Act. The share must also satisfy a holding period requirement as provided by paragraph (b) of the QSBC share definition in subsection 110.6(1) of the Act. In addition, the share or the shares of a connected corporation, must be a share of a corporation that meets an active business test as required by paragraph (c) of the QSBC share definition in subsection 110.6(1) of the Act. Furthermore, a more rigid active test, provided in paragraph (d) of the QSBC share definition in subsection 110.6(1) of the Act will apply with respect to certain corporations connected with the corporation under certain conditions.

The proposed Income Tax Amendments of the definition of a "QSBC share" do not appear to alter your situation. The amendment to subclause (c)(ii)(A) of the definition ensures that the holding period operates appropriately when shares of an operating company are transferred by the original shareholder through more than one level of holding corporations and the amendments to paragraph (d) of the definition restricts its application to those corporations connected with the particular corporation in which the particular corporation has a direct or indirect interest. In the situation you describe, A. Limited appears to satisfy the test in the definition of "QSBC share" stated in subparagraph 110.6(1)(c)(i) as more than 50% of A. Limited's assets are used in an active business throughout the 24 months immediately preceding the determination time. The use of the word "or" between subparagraphs (c)(ii) and (c)(iii) indicates that only one of the three subparagraphs must be satisfied. Accordingly, in the circumstances of this hypothetical example, there is no need to consider subparagraph (c)(ii) or paragraph (d) of the definition of a "QSBC share". If, at the determination time, all or substantially all of the fair market value of the assets of A. Limited are a combination of assets used principally in an active business and shares of a small business corporation that was connected with the particular corporation such that A. Limited is a small business corporation as defined in subsection 248(1), the A. Limited shares would appear to meet the definition of "qualified small business corporation shares".

The above comments are only expressions of opinion on the application of the Income Tax Act to the above hypothetical situation and as such should not be construed as advance income tax rulings, nor are they binding on the Department. Should you require an advance ruling with respect to the specific situation please follow the procedure described in Information Circular IC 70-6R2 [Information Circular 70-6R2].

We trust our comments are of assistance.