Principal Issues: Can assets held by a trust, of which a corporation is the beneficiary, be considered assets of the corporation for purposes of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Income Tax Act?
Position: No.
Reasons: Assets of a corporation for purposes of the "asset utilization test" in paragraph 110.6(1)(c) of the QSBC definition are assets of the corporation and shares of a connected corporation held by the corporation.
2006-021730 XXXXXXXXXX François Bordeleau, Advocate February 12, 2008
Dear Sir,
Subject: Capital gains exemption - meaning of the word “attributable”
This is in response to your request of November 25, 2006 for our opinion on the capital gains exemption. We apologize for the delay in responding to your question.
You wish to know whether property held by a trust of which a corporation is the sole beneficiary can be considered assets of the corporation for the purposes of the definition of "qualified small business corporation share" ("QSBC") in subsection 110.6(1) of the Income Tax Act (the “Act”). You indicated that the shareholders of the corporation wish to take advantage of the capital gains exemption provided for in subsection 110.6(2.1).
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Opinion
The situation you have indicated in your letter appears to relate to an actual situation involving a specific taxpayer. As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice 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 appropriate tax treatment, that 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.
In order for the corporation's shares to be considered QSBCs, they must meet several criteria, including the asset utilization test in paragraph 110.6(1)(c) of the QSBC definition. Generally, that paragraph requires that, throughout that part of the 24 months immediately preceding the disposition of the shares, the shares must be shares of the capital stock of a Canadian-controlled private corporation more than 50% of the fair market value of the assets of which was attributable to assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it, or to shares of the capital stock or indebtedness of one or more other corporations that were connected with the corporation.
In this case, you submit that the corporation's beneficial interest in the trust is a relevant asset for purposes of determining whether the asset utilization test is satisfied. In addition, you argue that the fair market value of that beneficial interest is attributable to property that the trust leases to the corporation's subsidiary.
We cannot agree with your position. In particular, pursuant to subparagraph 110.6(1)(c)(i) of the definition of QSBC, the Canada Revenue Agency is of the view that the phrase "attributable to assets used principally in an active business carried on … by the corporation" should be interpreted to refer to the fair market value of assets owned by the corporation. In other words, the corporation's beneficial interest in the trust is not an asset used principally in an active business carried on by the corporation or a corporation related to it, regardless of how the trust uses the property it holds.
These opinions are not advance decisions and, as stated in paragraph 22 of Information Circular 70-6R5 of 17 May 2002, are not binding.
Best regards,
Randy Hewlett
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.