| 19(1) | File No. 5-9203 |
| M. Vallée | |
| (613) 957-2093 |
February 14, 1990
Dear Sirs:
Re: Technical Interpretation Qualified Small Business corporation Share
This is in reply to your letter dated November 27, 1989 whereby you requested our opinion with respect to a hypothetical situation which you described as follows:
1. Father controls OP Co. which carries on an active business in Canada.
2. Father also controls R Co. which has borrowed funds from OP Co. to purchase real estate which is leased to Op Co. and used in its active business.
3. The loan of OP Co. to R Co. constitutes 25% of the value of OP Co.'s assets.
We have assumed, for purposes of our response, that Op Co. is not in the business of lending money.
You requested our opinion as to whether the loan made by OP Co. to R Co. could be considered to be as an asset ""used in an active business carried on primarily in Canada by the corporation or a corporation related to it"" for purposes of subparagraph (c)(i) of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Income Tax Act (the ""Act""), the (the "Definition").
Our Comments
We are of the opinion that the loan from Op Co. to R Co. would not be an asset used in an active business carried on by Opco. or R Co., and would therefore not be an asset described in subparagraph (c)(i) of the Definition.
However, it is our view that R Co. would be connected with Op Co. within the meaning of subsection 186(4) of the Act. Accordingly, the loan could be an asset described in subparagraph (c)(ii) of the Definition provided that the loan:
(a) constituted a "bond, debenture, bill, note, mortgage, hypothec or similar obligation" (a "Qualifying Obligation"); and
(b) satisfied the requirements in clauses (c)(ii)(A) and (B) of the Definition as modified, if necessary, by paragraph (d) of the Definition.
It is our view that an unsecured intercompany loan that is not evidenced in writing does not constitute a Qualifying Obligation. Whether or not a loan satisfied the requirements referred to in (a) and (b), above, could only be determined after a review of all the relevant circumstances.
In accordance with the guidelines described in paragraph 24 of information Circular 70-6R dated December 18, 1978, the comments expressed in this letter do not constitute advance income tax rulings and consequently are not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch