Principal Issues: [TaxInterpretations] Based on the facts presented, do shares of a Canadian-controlled private corporation that carries on an active business qualify as qualified small business corporation shares for the purposes of the capital gains exemption?
Position: A question of fact. The second condition, which requires that the shares not have been owned by anyone other than the individual (the person claiming the capital gains exemption) or a person or partnership related to him or her, appears to be satisfied.
Reasons: Income Tax Act. See paragraph 110.6(14)(d) of the Act.
XXXXXXXXXX 2009-031023 F. Bordeleau, LL.B. June 3, 2009
Dear Madam,
Subject: Capital gains exemption - qualified small business corporation shares
This is further to your letter of February 10, 2009 requesting our views on the capital gains exemption in respect of qualified small business corporation shares ("QSBCS").
More specifically, you are seeking our opinion on the application of paragraph 110.6(14)(d) of the Income Tax Act (the "Act") in light of the following facts:
- X and Y are taxpayers who held equal interests in a partnership ("SNC");
- SNC owned all of the shares of ABC Inc;
- ABC Inc. was a Canadian-controlled private corporation ("CCPC") that carried on an active business;
- X and Y held their interests in SNC for a minimum period of 24 months and the shares of ABC Inc. were held by SNC during the same minimum 24-month period;
- SNC was dissolved and a rollover of the shares held by SNC in ABC occurred pursuant to subsection 98(3) of the Act to X and Y in proportion to their interests in SNC;
- Within 24 months of the dissolution, the shares of ABC Inc. were sold to unrelated third parties;
- During the 24 months preceding the dissolution until the disposition of the shares of ABC, the fair market value of the assets of ABC was at all times more than 90% used in an active business.
You therefore wish to know whether the ABC Inc. shares sold by X and Y can be considered as QSBCS and thus give rise to the capital gains exemption provided for in subsection 110.6(2.1) of the Act. Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Our comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of our Directorate not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received adequate 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 may not apply in full to the situation you have submitted to us.
In order for a share of the capital of a corporation to qualify as a QSBCS, it must meet three requirements. First, it must, at the time of disposition, be a share of a small business corporation owned by the individual - the one wishing to access the capital gains exemption on the sale of QSBCS – the individual’s spouse or common-law partner or a partnership related to the individual. Second, throughout the 24-month period preceding the time of disposition of the share, the share must not be owned by anyone other than the individual or a person or partnership related to the individual. Finally, throughout the portion of the 24-month period preceding the time of disposition of the share, where the share is owned by the individual or a person or partnership related to the individual, the share must be a share of the capital stock of a CCPC more than 50% of the fair market value of the assets of which is attributable to assets that are used principally in an active business carried on primarily in Canada by the corporation or a corporation related to it.
For the purposes of our analysis, and consistently with what you have indicated to us, we have assumed that the first and third requirements above were satisfied and that the only issue to be resolved relates to the ownership of the shares throughout the 24-month period prior to the time of disposition.
In the situation you have described, X and Y directly owned the shares of ABC Inc. for a period of less than 24 months prior to the time of disposition. Before X and Y owned the shares of ABC Inc., they were property of SNC.
Paragraph 110.6(14)(d) reads as follows:
For the purposes of the definition "qualified small business corporation share" in subsection (1): …
(d) a partnership shall be deemed to be related to a person for any period throughout which the person was a member of the partnership;
In this case, in order for the shares of ABC Inc. to qualify as QSBCS, it is necessary that, during the months in which the shares of ABC Inc. were not owned by X and Y, they were the property of a person or partnership that was related, during those months, to X and Y.
In light of the facts that you have submitted to us, we are of the view that, throughout the 24-month period preceding the disposition of the ABC Inc. shares by X and Y, they were not owned by anyone other than a person or corporation related to them.
These comments do not constitute an advance income tax ruling and are not binding on the Canada Revenue Agency in respect of any particular factual situation.
Best regards,
François Bordeleau
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.