Principal Issues: [TaxInterpretations translation] Can an undivided interest in a share be a "qualified small business corporation share" as defined in subsection 110.6(1)?
Position: An undivided interest in a share would be considered a share for the purposes of determining whether it is a qualified small business corporation share as defined in subsection 110.6(1). Thus, if all of the conditions set out in that definition were satisfied, the undivided interest in the shares would be eligible for the capital gains deduction under subsection 110.6(2.1).
XXXXXXXXXX Sylvie Labarre, CA
2004-009200
June 9, 2005
Dear Madam,
Subject: Undivided interest in a share
This is further to your letter of August 13, 2004, in which you requested our opinion regarding the definition of "qualified small business corporation share" in subsection 110.6(1) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your request.
Facts
Three individuals held an equal interest in a Canadian partnership.
The partnership held all of the shares of the capital stock of a Canadian-controlled private corporation within the meaning of subsection 125(7).
Pursuant to the provisions of subsection 98(3), the partnership was dissolved and all of the property of the partnership was distributed to its members, according to their interest, such that each such person has an undivided interest, expressed as a percentage, in each share of the capital stock of the corporation.
The corporation satisfied, for the previous 24 months, the conditions required in order to be considered a small business corporation within the meaning of subsection 248(1).
One of the shareholders has held undivided rights to the shares for more than 24 months due to the dissolution of the partnership. He plans to sell his undivided shares to a third party. He wishes to claim the capital gains deduction provided for in subsection 110.6(2.1).
Question
You wish to know if the disposition of the undivided interest in the shares held by this shareholder will qualify for the capital gains deduction pursuant to subsection 110.6(2.1).
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, 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. These comments may not, however, apply to your particular situation in certain circumstances.
We are of the view that the term "share" used in the definition of "qualified small business corporation share" in subsection 110.6 includes an undivided interest in a share. Thus, a partner receiving undivided interests in shares held by a partnership in accordance with subsection 98(3) could be considered to hold shares of the corporation for the purpose of determining whether the recipient is entitled to the capital gains deduction under subsection 110.6(1).
According to the facts you have indicated, the shareholder has held the undivided interests in the shares for more than 24 months and will continue to hold them until their disposition. In addition, the corporation will be a small business corporation at the time of the disposition and throughout the 24-month period preceding the disposition. Subject to verification of those facts, it is our opinion that the undivided interests in the shares held by this shareholder would be qualified small business shares that could qualify for the capital gains deduction under subsection 110.6(2.1).
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Directorate General for Policy and Planning