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| W.P. Guglich | |
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24(1)
Attention: 19(1)
January 24, 1992
Dear Sirs:
Re: Paragraph 110.6(1)(d) of the Income Tax Act (the "Act")
Definition of "Qualified Small Business Corporation Share" (QSBCS)
This is in reply to your fax sheets of October 16 and 29, 1991 wherein you request our views concerning the application of the definition of a QSBCS (the Definition) in subsection 110.6(1) of the Act, as amended in Bill C-18, to four hypothetical examples. In particular you are concerned whether the all or substantially all test respecting the assets (the "90% test") has been met in each example.
Example 1:
Corporation A: 1% Active Assets50% Shares of B49% Inactive Assets
Corporation B:80% Active Assets20% Shares of C
Corporation C:51% Active Assets49% Inactive Assets
We agree with your conclusion that Corporation A would not meet the requirements of paragraph (d) of the Definition.
Example 2:
Corporation A: 1% Active Assets50% Shares of B 5% Shares of C44% Inactive Assets
Corporation B:90% Active Assets10% Shares of C
Corporation C:51% Active Assets49% Inactive Assets
We agree with your conclusion that Corporation A would meet the requirements in paragraph (d) of the Definition. Corporation B meets the 90% test based on its own active assets. Corporation A would meet the requirement of paragraph (d) of the Definition based on meeting the "more than 50%" test by virtue its own active assets and its ownership of the shares of Corporation B, 90% of whose assets are qualifying assets.
Example 3:
Corporation X:49% Active Assets51% Shares of Y
Corporation Y:61% Active Assets27% Shares of Z12% Inactive Assets
Corporation Z:57% Active Assets43% Inactive Assets
We agree with your conclusion that Corporation X would meet the requirements of paragraph (d) of the Definition. Corporation X meets the 90% test by virtue of the fact that all or substantially all of its assets are described in either subparagraph (c)(i) or clause (c)(ii)(B) of the Definition.
Example 4:
Corporation X:49% Active Assets51% Shares of Y
Corporation Y:49% Active Assets39% Shares of Z12% Inactive Assets
Corporation Z:57% Active Assets43% Inactive Assets
We agree with your conclusion that Corporation X in this example does not meet the requirements of paragraph (d) of the Definition. Corporation Y does not met the 90% test. Accordingly, Corporation Z must meet the 90% test in order for its shares to be qualifying assets of Corporation Y. As Corporation Z does not, the shares of Corporation Y represent only 49% qualifying assets and consequently are not themselves qualifying assets to Corporation X.
We trust our comments will be of assistance to you.
Yours truly,
E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch