5-903327
Dear Sirs;
We are replying to your letter of November 23, 1990 wherein you requested our views regarding the application of section 110.6 of the Income Tax Act (the "Act") to the series of transactions described below.
Facts1.
2. 24(1)
3.
4.
5.
6. 24(1)
Proposed Transaction
7.
24(1)
Our Comments
The situation outlined in your letter appears to relate to specific proposed transactions with identifiable taxpayers. Confirmation of the tax consequences relating to specific proposed transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 70-6R2 dated September 28, 1990. We can, however, offer the following general comments.
In order for the capital gains deduction contained in subsection 110.6(2.1) of the Act to apply, there must be a disposition by an individual of a "qualified small business corporation ("QSBC") share". Whether a share will be a QSBC share, as defined in subsection 110.6(1) of the Act is a question of fact to be determined based on the various factual tests set out in that provision being met at the determination time referred to in the provision and for the period described therein.
Paragraph (b) of the definition of QSBC share in subsection 110.6(1) of the Act provides that the share may not be owned by anyone other than the individual or a person or partnership related to the individual throughout the 24 months immediately preceding the determination time.
Paragraph 110.6(14)(f) of the Act provides that shares issued after June 13, 1988 by a corporation shall be deemed to have been owned immediately before their issue by an unrelated person unless they were issued, inter alia, as consideration for other shares.
Paragraph (e) of the QSBC share definition in subsection 110.6(1) of the Act provides that where, at any time in the 24 month period ending at the determination time, the share was substituted for another share, the share shall be considered to have met the requirements of that definition only where, inter alia, the other share was not owned by an unrelated person or partnership throughout that part of the 24 month period ending at the determination time that ends at the time of substitution. It is the Department's view that shares received as the result of an amalgamation will be substituted shares for the purpose of this provision.
Notwithstanding that subsection 47(1) of the Act may apply to average the adjusted cost base of identical properties which have been acquired at different times, for the purposes of determining whether a share is a QSBC share, paragraph 110.6(14)(a) of the Act provides that a taxpayer is deemed to have disposed of shares that are identical properties in the order in which they were acquired. However, where shares of a corporation have been acquired on the amalgamation of two or more predecessor corporations, such shares would not appear to have been acquired at different times.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of Information Circular IC 70-6R2 dated September 28, 1990 this opinion is not a ruling and accordingly is not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch