| 24(1) | 5-913305 |
| D.J. Powrie | |
| (613) 957-2109 |
Attention: 19(1)
May 12, 1992
Dear Sirs:
Re: Definition of small business corporation
This is in reply to your letter of November 26, 1991 in which you requested our opinion as to the application of the definition of "small business corporation" in section 248[FN: All statutory references are references to the Income Tax Act.] to a hypothetical situation.
Assumptions
Our opinion is based on the following assumptions:
1. Mr. A owns all of the shares of Holdco which owns all of the shares of Opco.
2. Holdco's only assets are Opco shares.
3. Opco has $600 worth of assets which it uses principally in an active business carried on primarily in Canada and is owed $400 by Holdco.
The question you have asked is whether we think Opco is a small business corporation as defined in subsection 248(1).
Your views
You concluded that Opco is a small business corporation because all of its assets are either:
1. assets used principally in an active business carried on primarily in Canada by it; or
2. indebtedness of Holdco, which is connected with Opco and which is itself a small business corporation.
The analysis in your letter was devoted to supporting the conclusion that Holdco is connected with Opco within the meaning of subsection 186(4) on the assumption that Holdco was a "payer corporation" within the meaning of that subsection.
Our views
In our opinion, neither Holdco nor Opco is a small business corporation. We agree that Holdco is connected with Opco within the meaning of subsection 186(4) on the assumption that Holdco was a payer corporation. However we do not agree that Holdco is a small business corporation so we cannot agree that Holdco's indebtedness to Opco is a qualifying asset for the purposes of determining if Opco is a small business corporation. For Holdco to qualify as a small business corporation the shares of Opco which it holds must be shares in a small business corporation. For Opco to qualify, Holdco's indebtedness must be debt owed by a small business corporation. Thus, neither company can meet the definition and neither is a small business corporation.
We have informed the Department of Finance of this circularity problem in the definition of "small business corporation" and of our view that the application of the law as it now reads leads to inappropriate results in many circumstances. The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch