| 24(1) | 902299 |
| L. Holloway | |
| (613) 957-8953 |
19(1)
October 1, 1990
19(1)
Re: Qualified Small Business Share
This is in reply to your letter dated August 21, 1990, wherein you requested our interpretation with respect to paragraph 110.6(14)(f) of the Income Tax Act.
Our understanding of the hypothetical facts of the situation is as follows:
1. Canco is a Canadian controlled private corporation whose only asset is a parcel of land.
2. Canco's sole shareholder, an individual resident in Canada, has held the shares for over two years.
3. Canco leases the land to the shareholder's unincorporated business, a car wash.
4. The land has been exclusively used in this active business for over two years.
5. The shareholder incorporates his proprietorship.
Specifically you asked whether the "24 month - use of assets test", as contained in subsection 110.6(1), would be met by Canco by virtue of the application of subparagraph 110.6(14)(f)(ii) to the newly incorporated car wash business.
Our Comments
Under paragraph 110.6(1)(b) shares must not have been owned by anyone other than the individual or a person or partnership related to him throughout the 24 months preceding the determination time in order to meet the definition of "qualified small business corporation share" (qsbcs). This holding period requirement does not require the individual to hold the shares for 24 months, merely that no unrelated person hold the shares during the holding period. Paragraph 110.6(14)(f) of the Income Tax Act provides that shares issued by a corporation are treated as having been owned by a person or partnership not related to the person or partnership receiving the shares before their issue. One exception to this rule is found in 110.6(14)(f)(ii) and has application if the shares were issued in consideration for the transfer of assets to the corporation that were used in an active business carried on by that person. As indicated in Interpretation Bulletin IT-486R it is a question of fact whether an asset is used in an active business.
If, upon examining all facts, it is determined that the assets transferred to the corporation were all or substantially all of the assets used by the former car wash proprietorship in carrying on an active business, then these new shares will not be deemed to have been owned by unrelated persons prior to their issue for purposes of the 24 month holding period requirement. The exception found in subparagraph 110.6(14)(f)(ii) does not deem the new corporation to be in existence for 24 months, rather it merely provides an exception to the full 24 month holding period requirement in the qsbcs definition.
For purposes of the shares of Canco meeting the definition of a qsbc, its' assets must have been used in an active business carried on by it or a corporation related to it "throughout that part of the 24 months immediately preceding the determination time while it was owned by the individual..." as explained by requirement (c)(i) of the definition. Although Canco's shares have been owned by the taxpayer for 24 months, and it's assets have been used in an active business, the requirement that the assets be used by the corporation or a corporation related to it during this time period has not been met. The newly formed corporation had not been in existence for the specified time period, therefore Canco's assets were not being used by a corporation related to it during this interval.
We hope these comments are of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch