Principal Issues: [TaxInterpretations translation] A taxpayer is actively carrying on a business and the building used in that business is leased from an arm's length third party. The taxpayer wishes to transfer all the assets of the business - excluding the building of course - to the taxpayer's corporation. Will the shares received from the corporation qualify as qualified small business corporation shares?
Position: Question of fact. In this case yes.
Reasons: The requirement "all or substantially all of the assets" refers to assets owned by the taxpayer that are used in an active business.
XXXXXXXXXX 2011-042648
November 21, 2011
Dear Sir,
Subject: Qualified small business corporation shares
This is in response to your e-mail dated October 25, 2011 regarding the above subject.
Please note that, unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described a situation where an individual carries on a business as a sole proprietorship in a building that the individual rents from a third party. The individual wishes to incorporate the business and qualify for the capital gains exemption applicable to qualified small business corporation shares within less than 24 months of incorporation.
The individual would incorporate a corporation ("Corporation A") and transfer all of the business assets in accordance with section 85, including the rights under the lease.
Since the value of the building would represent more than 10% of the assets used by the taxpayer in the carrying on of the business, you wish to know if the requirement in clause 110.6(14)(f)(ii)(A), that all or substantially all of the assets used in an active business carried on by the individual are to be transferred to Corporation A, would be satisfied.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you.
An individual who realizes a gain on the sale of qualified small business corporation shares, as that term is defined in subsection 110.6(1), may claim a deduction in computing the individual’s taxable income in accordance with subsection 110.6(2.1). A share is a qualified small business corporation share if it is a share of a small business corporation and, if in particular, throughout the 24-month period preceding the time of its disposition, it was not owned by any person other than the individual or a person or partnership related to the individual.
That ownership test does not require the individual to hold the shares for a period of 24 months. Rather, during that 24-month period, no person who is not related to the individual can have held those shares.
For this purpose, paragraph 110.6(14)(f) contains a presumption that shares issued after June 13, 1988 by a corporation to a particular person or partnership are deemed to have been owned immediately before their issue by a person who was not related to the particular person or partnership, unless the shares were issued in the circumstances set out in that paragraph. However, subparagraph 110.6(14)(f)(ii) specifies that shares that were issued as part of a transaction or series of transactions in which the person “[...] disposed of property to the corporation that consisted of (A) all or substantially all of the assets used in an active business carried on by that person [...]” is not subject to that presumption.
Generally, where 90% or more of the assets of a business are transferred to a corporation, we consider that all or substantially all of the assets of the business are transferred to the corporation. In the situation you described, it is necessary to determine whether the individual transferred all or substantially all of the assets that belonged to the individual and that were used in the business that the individual was actively carrying on. In our view, it would appear that the individual could benefit from the capital gains deduction applicable to the qualified small business corporation shares he would receive from Corporation A.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate