| 19(1) | File 5-9537 |
| R.B. Day | |
| (613) 957-2136 |
June 5, 1990
Dear Sirs:
We are writing in reply to your letter of February 1, 1990, wherein you requested our comments regarding your interpretation of the definition of a share of the capital stock of a qualified small business corporation (QSBC), as set out in subsection 110.6(1) of the Income Tax Act, with respect to the following related situations.
Situation 1
A corporation (Realco) has as its sole assets land and buildings which are leased to a connected corporation (Opco). Opco carries on an active business in Canada. The shares of Realco have been owned by the same individuals for the previous 24 months. The individuals are all residents of Canada. The only assets of Realco during this period of time were the leased land and building; the acquisition of which was financed by borrowings from a financial institution and by issuing share capital.
Realco will be considered a small business corporation (SBC) pursuant to the definition in subsection 248(1), since it is a Canadian-controlled private corporation (CCPC) and all or substantially all of the fair market value of its assets are used in an active business carried on in Canada by a corporation related to it. A share of Realco will be considered a QSBC share by virtue of the definition in subsection 110.6(l), since (I) a share of Realco is a share of a SBC owned by an individual, (2) throughout the immediately preceding 24 months the share was not owned by anyone other than the individual, and (3) throughout the preceding 24 months more than SOS of the fair market value of its assets were attributable to assets used in an active business carried on in Canada by a corporation related to it.
Situation 2
As a variation of the above situation, Opco has loaned funds by way of a non-interest bearing promissory note to Realco to Finance the acquisition of the land and construction of the building. The amount of the note exceeds 10% but is less than 50% of the fair market value of Opco's assets. The shares of Opco have been owned by the same individuals for the previous 24 months. The individuals are all residents of Canada.
Opco will be considered a SBC pursuant to the definition in subsection 248(1), since it is a CCPC and all or substantially all of the fair market value of its assets consist of a combination of (1) assets used in an active business carried on by it in Canada, and (2) a note issued by a connected SBC (being Realco). A share of Opco will be considered a QSBC share pursuant to the definition in subsection 110.6(l), since (1) a share of Opco is share of a SBC owned by an individual, (2) throughout the immediately preceding 24 months the share was not owned by anyone other than the individual, and (3) throughout the preceding 24 months more than 50% of its assets were attributable to a combination of (a) assets used in an active business carried on by it and (b) a note issued by a connected SBC (being Realco).
Our Comments
We have analyzed the two situations described above in conjunction with the relevant provisions in the Income Tax Act. It is our opinion that the shares of Realco, in the first situation, would be shares of a QSBC as defined in subsection 110.6(1).
With respect to your query regarding whether or not Opco need be in the business of lending money in order for Realco's note to be a qualifying asset, it's our opinion that in the context of the above-noted situations, such a requirement would not be crucial, on the assumption that, when you say Opco is connected to Realco, you mean that Realco is the "payer corporation" and Opco is the "particular corporation" when reading subsection 186(4) for purposes of the SBC definition. If that is the case, the shares of Opco in your second situation would be shares of a QSBC.
However, if in the second situation, Realco and Opco were not connected or were connected only if Opco were read as the "payer corporation" in subsection 186(4), the intercompany debt owed by Realco to Opco would not qualify under paragraph (b) of the definition of a $56 and would qualify under paragraph (a) as an asset used in an active business only if Opco was in the business of lending money.
We would caution that the above comments represent an expression of opinion only, and as such, are not binding upon the Department.
Yours truly,
For DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch