Mr. A and Ms. B, who deal with each other at arm's length, have held 50% each of the shares of Opco and of Realtyco for over 24 months. All of the property of Opco is used in its Canadian manufacturing business and Realtyco owns an immovable with an FMV that is fully leased to Opco and a debt owing by Opco of $125,000. In finding that the Realtyco shares were not qualified small business corporation shares ("QSBCS"), CRA stated:
[T]he debt owed by Opco would not constitute a debt of a small business corporation that is connected with Opco for the purposes of paragraph (b) of the definition of SBC in subsection 248(1). Indeed … Opco is not connected with Realtyco within the meaning of subsection 186(4).
Consequently, Realtyco would not be a SBC within the meaning of subsection 248(1), since only about 44% ($100,000 out of $225,000) of the fair market value of its assets would be attributable to items falling within that definition of SBC.
… [A] prior reorganization of Realtyco could not resolve these difficulties because of the "more than 50%" test for the fair market value of the asset during the 24-month holding period in paragraph (c) of the definition of QSBCS … .