| 19(1) | File No. 5-9780 |
| S. Shinerock | |
| (613) 957-2108 |
April 26,1990
Dear Sirs:
Re: Definition of a Qualified Small Business Corporation Share ("QSBCS") under Subsection 110.6(1) of the Income Tax Act (the "Act")
In your letter of March 12, 1990, you requested a technical interpretation with respect to paragraphs (c) and (d) of the QSBCS definition in subsection 110.6(1) of the Act. The type of situation you have in mind is illustrated in the hypothetical situation described below.
Holdco is a Canadian-controlled private corporation within the meaning assigned by paragraph 125(7)(b) of the Act. The shares of Holdco are held by Mr X, who has owned them throughout the last 24 months. The assets of Holdco, throughout the last 24 months, have consisted of the following:
(a) cash in the amount of $1,500,000;
(b) all of the shares of Opco, having a fair market value of $10,000,000;
(c) all of the shares of Subco, having a fair market value of $100,000.
Throughout the last 24 months, all of the assets of Opco have been used in an active business carried on primarily in Canada by Opco. However, for some period of time in the 24 month period that would end at the determination time referred to in paragraphs (c) and (d) of the QSBCS definition, all or substantially all of the fair market value of Holdco's assets were not attributable to assets described in subparagraphs (c)(i) or (c)(ii) of the definition.
Subco does not carry on an active business.
You are of the opinion that the conditions set forth in paragraphs (c) and (d) of the definition of a QSBCS have been met in that, throughout the last 24 months:
(a) At least 50% of the fair market value of the assets of Holdco were attributable to shares of the capital stock of Opco; and
(b) Throughout the last 24 months, all of Opco's assets were used in an active business carried on primarily in Canada.
Your opinion recognizes the fact that Subco was not carrying on an active business throughout the last 24 months. However, you consider that this is irrelevant given that the shares of Opco continuously represented more than 505 of the fair market value of all of Holdco's assets and Opco was, during the relevant period, a small business corporation, within the meaning assigned under subsection 248(1) of the Act.
Comments
Before commenting on the application of paragraphs (c) and (d) of the QSBCS definition as it would apply to the above situation, we should like to note that, of the total fair market value of $11.6 million in respect of Holdco's assets, 86.25 consist of assets described in either of subparagraph (c)(i) or (c)(ii) of the QSBCS definition. Consequently, Holdco would not be a small business corporation as referred to in paragraph (a) of the definition on the assumption that the "determination time" referred to therein were the present time.
Clause (c)(ii)(B) of the QSBCS definition requires that, throughout that part of the 24 months immediately preceding the determination time while the shares of Opco and Subco were owned by Holdco, they were shares of CCPC's more than 50% of the fair market value of the assets of which was attributable to assets described in either subparagraph (c)(i) or (c)(ii) of the definition. Paragraph (d) of the definition then modifies clause (c)(ii)(B) by requiring that a reference to "more than 50%" be read as a reference to "all or substantially all" in respect of other corporations (i.e. Opco and Subco) connected (within the meaning of subsection 186(4) of the Act) with the corporation (i.e. Holdco) in a particular situation.
This stricter test is necessary where, for any period of time in the 24 month period ending at the determination time, all or substantially all of the fair market value of the assets of a corporation (i.e. Holdco) cannot be attributed to assets used in an active business carried on primarily in Canada by Holdco, or shares or obligations of corporations described in clause (c)(ii)(B) of the QSBCS definition. Opco and Subco must meet this stricter test, because Holdco does not, for some period of time, meet the "all or substantially all" test.
In the above situation, all of the assets of Opco have been used in an active business throughout the last 24 months. Assuming that these assets have a fair market value of $10,000,000, then this value as a proportion of the fair market value of all of Holdco's assets (i.e. $11,600,000) is 86.25, as indicated above. Consequently, the fair market value of Opco alone is sufficient to meet the "more than 50% fair market value" test in the preamble of paragraph (c) of the QSBCS definition, as modified by paragraph (d), and we agree that the fact that Subco was not carrying on an active business throughout the last 24 months is irrelevant to this conclusion.
As stated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch