| 24(1) | File No. 5-9347 |
| M. Eisner | |
| 19(1) | (613) 957-2138 |
February 6, 1990
Dear Sirs:
We are replying to Mr. 19(1) remarks which were made in respect of a letter of ours dated May 12, 1989, a copy of which you obtained under The Access to Information Act.
The letter dealt with the following hypothetical situation:
1. Holdco a CCPC owns a number of subsidiaries. One of the subsidiaries, Opco has a fair market value in excess of 90% of the value of Holdco.
2. Opco's assets are used in its active business. Substantially all of the fair market value of Opco is attributable to the value of management contracts and goodwill.
3. The other subsidiaries of Holdco do not have substantially all of the assets used in an active business.
It is important to note the assumption stated in our letter of May 12, 1989, that all subsidiaries of Holdco are owned directly by Holdco (A owns B; A owns C). The opinions expressed in that letter and in this one do not address the situation of a chain of corporations (A owns B; B owns C).
Before addressing the remarks, we note that paragraph (d) of the definition of "qualified small business corporation share" (qsbcs) in subsection 110.6(1) of the Income Tax Act provides that, where a corporation does not satisfy the "all or substantially all" requirement throughout a 24 month period, clause (c)(ii)(B) of the qsbcs definition is modified by paragraph (d) so that the phrase "more than 50%" is replaced with "all or substantially all". Other than this modification, paragraph (d) has not effect on any of the preceding paragraphs in the qsbcs definition.
With respect to the above hypothetical situation, we had expressed the view that, where Holdco's holdings in Opco account for more than 50% of the fair market value of its assets, then only Opco must meet the 90% test. With respect to this opinion, clause (c)(ii)(B) of the qsbcs definition would be modified by paragraph (d) in the manner previously mentioned. It would follow that if more than 50% of the fair market value of Holdco's assets are attributable to assets described in clause (c)(ii)(B) as modified by paragraph (d) (i.e. the holding in Opco), the assets held by Holdco's other subsidiaries would be irrelevant, notwithstanding that they are investment corporations which do not assist Holdco in meeting the 50% test in the preamble of paragraph (c).
We agree with Mr. 19(1) that, on the basis of the facts given, Holdco satisfies the "all or substantially all" requirement in paragraph (d) throughout the 24 month period and, accordingly, the connected corporations need only meet the 50% test. However, since the query provided to us concerned the effect of paragraph (d) in relation to Holdco's subsidiaries for a period during which Holdco did not meet the 90% test, we assumed for the purpose of our reply that there was a period during which Holdco's holdings in Opco fell below the 90% of the fair market value of Holdco's assets while remaining greater than 50%, and that during this period Opco met the "all or substantially all" test. On this assumption, the assets held by Holdco's other subsidiaries would be irrelevant for the purposes of the 50% test in the preamble of paragraph (c) of the qsbcs definition, in the sense that Holdco would meet the test even if the other subsidiaries are not assets described in clause (c)(ii)(B) as modified by paragraph (d).
It is also our view that if, at the determination time, Holdco's holding in Opco accounted for 90% or more of the fair market value of its assets, this asset would comprise "all or substantially all of the fair market value of the assets" for the purposes of the definition of "small business corporation" in subsection 248(1) even though none of Holdco's holdings in other subsidiaries are described in that definition.
Finally, we would like to thank you for giving us this opportunity to clarify our position with respect to this matter.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch