Principal Issues: Whether certain shares would be "qualified small business corporation shares" such that a CGE under subsection 110.6(2.1) could be claimed.
Position: Question of fact, general comments only.
Reasons: See above.
XXXXXXXXXX 2011-041087 Michael Cooke, C.A. August 15, 2011
Dear XXXXXXXXXX :
Re: Qualified Small Business Corporation Shares and the Capital Gains Exemption
We are writing in reply to your letter of June 20, 2011, wherein you requested our views on the income tax implications under the Income Tax Act (the "Act") pertaining to a sale of shares of an individual's holding corporation. In particular, you asked whether the shares of the holding corporation would be "qualified small business corporation shares" ("QSBCS"), as that term is defined in subsection 110.6(1) of the Act, at the time of the sale.
Our Comments:
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
Where an individual (other than a trust) who is resident in Canada throughout the year realizes a taxable capital gain on the disposition of QSBCS in that year that individual may be entitled to a capital gains deduction in calculating his or her taxable income pursuant to subsection 110.6(2.1) of the Act.
The definition of a QSBCS contains three main tests that must be met before the individual's shares can be considered as being QSBCS for these purposes. The first test requires an examination of the use of the particular corporation's assets at the particular time the shares are sold (the "SBC Test"). The second test requires an examination of the continuity of ownership of the particular shares during the 24 month period immediately before the sale (the "Holding Period Ownership Test") and the third test requires an examination of the use of the corporation's assets throughout the 24 month holding period (the "Holding Period Asset Use Test").
1) SBC Test
Under the definition of "small business corporation" ("SBC") in subsection 248(1) of the Act, a corporation will, inter alia, be a SBC at any particular time where, subject to subsection 110.6(15) of the Act, the particular corporation is a CCPC and all or substantially all (i.e., 90% or more) of the fair market value ("FMV') of its assets at that time is attributable to assets that are
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
(b) shares of the capital stock or indebtedness of one or more SBCs that are at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the SBC is at that time a "payer corporation" within the meaning of that subsection), or
(c) assets described in paragraphs (a) and (b).
2) Holding Period Ownership Test
Paragraph (b) of the definition of QSBCS describes a holding period requirement that provides that throughout a period of 24 months immediately preceding the determination time, the share must not have been owned by any person or partnership other than the individual or a person or partnership that was related to the individual.
3) Holding Period Asset Use Test
Under paragraph (c) of the definition of QSBCS, throughout the 24 month period immediately preceding the sale of the shares of the particular corporation the corporation must be a CCPC and more than 50% of the FMV assets of the corporation must be attributable to "eligible assets". Eligible assets would consist of: (i) assets used principally in an active business carried on primarily in Canada by the corporation or by a related corporation; and (ii) shares or indebtedness of connected corporations where such corporations are CCPCs that also meet the 50% Holding Period Asset Test.
If the particular corporation itself has sufficient eligible assets described in (i) above to meet the 50% Holding Period Asset Use Test in paragraph (c) then the more stringent 90% Holding Period Asset Use Test described in paragraph (d) of the definition of QSBCS would not have to be considered.
We trust that these comments will be of assistance.
Yours truly,
Sandy Parnanzone
Manager
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch