Words and Phrases - "asset"

An individual holds the common shares of Holdco having an FMV of $1 million, and Holdco’s only asset is the common shares of Opco, also with an FMV of $1 million. $700,000 of Opco’s assets are used principally in its active business carried on primarily in Canada and $300,000 are excess cash. Stopping there, the para. (d) rule in the qualified small business corporation share (QSBCS) definition would not be engaged because 100% of Holdco’s assets were qualified assets, being shares of Opco which satisfied the 50% asset test in para. (b).

Suppose, however, that, under a “purification” transaction, Opco pays a cash dividend of $150,000 to Holdco, which immediately pays a dividend in the same amount to the individual. At the instant in time in which Holdco held such cash, more than 10% of its assets would not be the qualifying assets listed in para. (d), which would apparently mean that Opco at the relevant times would now be required to satisfy a 90% rather than 50% asset test, which would not be met because its excess cash assets were $150,000/$850,000, or 18%. However, the QSBC test would be met if the dividend was greater than $230,000 or less than $100,000.

(a) Would such holding of the $150,000 in cash by Holdco for an instant in time “contaminate” it and require a fresh 24-month period to restart?

(b) If instead Holdco declared and paid a $150,000 dividend, payable to its shareholder by a note, and Opco declared a dividend payable through discharging the note, with no new asset thereby being recorded on Holdco's balance sheet, would the result be the same?

(a) CRA noted that it “recognize[d] that the ‘all or substantially all’ test could be met even if the 90% threshold is not satisfied, depending on the circumstances and context” and further noted that if one of “the asset tests described in the definition of QSBCS in subsection 110.6(1) (more than 50% or all or substantially all) must be satisfied at all times during the relevant period …. is not met during the relevant period, even for a short period, a share of the capital stock of a corporation will not qualify as a QSBCS.”

(b) CRA stated:

Holdco has an interest in the dividend declared by Opco and … the interest in such a dividend is an "asset" for the purposes of the definition of QSBCS, regardless of whether it is recorded on the corporation's balance sheet. In particular, Holdco benefits from the dividend declared by Opco even if the amount of the dividend does not pass through Holdco because it allows Holdco to have its liabilities reduced following the payment made by Opco.