| 5-920383 | |
| 24(1) | M. Séguin |
| (613) 957-8953 |
Attention: 19(1)
May 14, 1992
Dear19(1)
This is in reply to your letter of February 4, 1992 wherein you ask for our opinion regarding the definition of qualified small business corporation share in subsection 110.6(1) of the Income Tax Act (the "Act").
You presented a situation where a shareholder's share in a corporation meets all the requirements of the definition of qualified small business corporation share under subsection 110.6(1) of the Act and the corporation qualifies as a small business corporation under subsection 248(1) of the Act at the time of the disposition. However, within the period of 24 months referred to in subsection 110.6(1) of the Act, the original common shares have been exchanged twice under subsection 86(1) of the Act for new common shares and a special class of shares on each occasion.
You are of the opinion that the common shares disposed by the shareholder in these circumstances would be considered qualified small business corporation shares as defined in subsection 110.6(1) of the Act and that the fact that more than one substitution of the original common shares occurred (you refer to paragraph (e) of the definition) would not, in itself, affect the eligibility to claim the capital gains deduction. You would like us to confirm your interpretation.
Commentary
We agree with your interpretation that the mere fact that there is more than one substitution of the original common share does not in itself prevent the substituted shares from qualifying. This assumes that the shares were all owned by the same shareholder and that the asset requirement of the definition are satisfied.
Under subsection 248(5) of the Act, the shares disposed of are deemed to have been substituted for the original common shares. Even if more than one substitution has occured, paragraph (e) of the definition of qualified small business corporation shares under subsection 110.6(1) of the Act could still apply.
However, since a special class of share has been issued on each exchange, it will remain a question of fact whether subsection 110.6(8) of the Act could apply to deny the capital gains deduction on the common shares.
The views expressed herein do not constitute an advance income tax ruling and, as stated in paragraph 21 of the Information Circular 70-6R2, are not binding on the department.
Yours truly,
for the DirectorReorganizations and foreign DivisionRuling Directorate