| 24(1) | 5-901465 |
| Maureen Shea-DesRosierss | |
| (613) 957-8953 |
19(1)
November 1, 1990
Dear Sirs:
Re: Labour-Sponsored Venture Capital Corporations Section 6700 of the Income Tax Regulations (the "Regulations")
This is in reply to your letter of June 28, 1990 wherein you ask whether the shares of the 24(1) qualify as shares of the capital stock of a corporation prescribed to be a small business investment corporation.
The question of whether or not shares of the 24(1) would be a "small business property so that a Registered Retirement Savings Plan ("RRSP") that acquired such shares would be entitled to the increased foreign property exemption provided by subparagraph 206(2)(c)(i) of the Income Tax Act is a question of fact to be determined at the time acquisition of the shares by an RRSP.
Whether 24(1) is a labour-sponsored venture capital corporation as described in section 6700 of the Regulations is a question of fact.
For a small business corporations share to be a qualified investment for an RRSP, the corporation must be an "eligible corporation" as defined in subsection 5100(1) of the Regulations. Pursuant to subparagraph 5100(1)(a)(i) of the Regulations, an eligible corporation is defined as a taxable Canadian corporation where substantially all of the property owned by the corporation is used in a "qualifying active business" in Canada. Pursuant to subparagraph 5100(1)(a)(ii) of the Regulations an eligible corporation is also defined to mean a taxable Canadian corporation where substantially all of the property owned by the corporation consists of shares of the capital stock of one or more eligible corporations that are related to it.
Secondly, the annuitant of the RRSP must not be a "designated shareholder" of the corporation as defined under subsection 4901(2) of the Regulations. Among other things, a "designated shareholder" includes a taxpayer who does not deal at arm's length with the corporation pursuant to paragraph 4901(2)(e) of the Regulations.
Furthermore, pursuant to paragraph 4901(2)(d) of the Regulations, an employee of a corporation or a related corporation would be a "designated shareholder" in a situation where any group of employees of the corporation or related corporation controls the corporation, except where the group of employees includes a person or a related group that controls the corporation directly or indirectly in any manner.
If 24(1) is an eligible corporation as defined in section 5100 of the Regulations, a share will be a "small business property" under subsection 5100(2) of the Regulations provided that, at the time of the shares acquisition, the taxpayer does not hold shares, debts, rights and options in the eligible corporation and corporations associated therewith with aggregate cost amounts in excess of $10,000,000 and the total assets of the eligible corporation and all corporations associated therewith does not exceed $35,000,000.
A small business property prescribed under subsection 5100(2) of the Regulations will also be a small business property as defined under subsection 206(1) of the Income Tax Act for the purposes of Part XI provided that the property is acquired after October 31, 1985 and the taxpayer who acquired the property is a prescribed person in respect of the property or is the first person to have owned the property.
If all of the above conditions are met, an RRSP that acquired such a share will be entitled to the increased foreign property limit provided in subparagraph 206(2)(c)(i) of the Act based on its "small business investment amount" as defined in subsection 206(1) of the Act.
We trust that the above comments will be of assistance to you. It should be noted, however, that the Regulations and provisions of the Income Tax Act dealing with the subject of your enquiry are detailed and complicated and that these comments are, of necessity, simply a general overview of them. For this reason, the comments are not binding on this Department.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch