| 921187 | |
| 24(1) | J.D. Brooks |
| (613) 957-2103 |
Attention: 19(1)
July 3, 1992
Dear Sirs:
Re: Qualified Small Business Corporation Shares
This is in reply to your letter of April 14, 1992 in which you requested our opinion as to whether certain shares in a hypothetical case you described would be qualified small business corporation shares ("QSBCS"s) within the meaning of subsection 110.6(1) of the Income Tax Act (the "Act").
The situation you described appears to involve specific taxpayers and specific contemplated transactions. As explained in Information Circular 70-6R2 dated September 28, 1990, assurance as to the tax consequences of proposed transactions is provided by the Rulings Directorate but only on an advanced income tax rulings basis and only with respect to the taxpayers identified in such rulings. Although we are unable to provide any opinion in respect of the specific case you have described, we have set out below some comments of a general nature which may be of assistance to you.
Our Comments
Vertical short-form amalgamations are governed by the applicable corporate law. Where the Canada Business Corporations Act ("CBCA") is applicable, subparagraph 184(1)(b)(iii) thereof provides that on a vertical short-form amalgamation "no securities shall be issued by the amalgamated corporation in connection with the amalgamation." Most provincial legislation governing business corporations contains a similar provision.
It is our view that, where the relevant corporate law requires that no new shares be issued by the amalgamated corporation on the vertical amalgamation (of, say, a holding corporation (Holdco) and its wholly owned subsidiary (Opco)), the shares of the amalgamated corporation (Amalco) owned by a shareholder (Mr. S) immediately following the amalgamation are the same shares as the shares which that shareholder held in the predecessor corporation (Holdco) immediately before the amalgamation. Therefore, in considering paragraph (b) of the definition of QSBCS in subsection 110.6(1) of the Act at the time immediately following the amalgamation, it is the ownership of the shares of Holdco throughout the preceding 24 months which would be relevant. Paragraph 110.6(14)(f) of the Act would not be relevant with respect to the shares of Amalco since no new shares would have been issued on the amalgamation.
However if, pursuant to the applicable corporate law, new shares were issued on the amalgamation, subparagraph 110.6(14)(f)(i) of the Act would preclude the application of paragraph 110.6(14)(f) since the new shares would have been issued in consideration for the shares of Holdco. Such new shares would be shares substituted for the shares of Holdco, and paragraph (e) of the definition of QSBCS would require one to consider the ownership of the shares of Holdco throughout the preceding 24 months.
Amalco may be a small business corporation ("SBC") within the meaning of subsection 248(1) of the Act even though one of its predecessors was not an SBC since paragraph (a) of the definition of QSBCS applies only at the determination time. Since paragraph (a) of that definition does not require all or substantially all of the assets of Amalco to be used in carrying on an active business in Canada for a particular period of time, the act of amalgamation in order to create a corporation which qualifies as an SBC would not be sufficient to cause subsection 245(2) to apply to deny a capital gains deduction under 110.6(2.1) to which a shareholder would otherwise be entitled on a disposition of his shares of Amalco at the determination time. However, the amalgamation itself does not enable the shares of Amalco (whether they be newly issued shares on the amalgamation, or a continuation of the shares of its predecessors) to satisfy the 24-month test regarding the employment of assets, as described in paragraph (c) of the definition of QSBCS if the shares of Holdco did not meet this test. For instance, if Mr. S continued to own his shares of Holdco since prior to the 24-month period ending immediately preceding the determination time and throughout that period more than 50% (but less than 90%) of the fair market value of the assets of Holdco was attributable to shares of Opco, but less than 90% of the fair market value of the assets of Opco were attributable to qualifying assets (as referred to in subparagraph (c)(iii) of the definition of QSBCS), then Amalco would not pass this test.
These comments represent an expression of opinion and, as stated in Information Circular 70-6R dated September 28, 1990, are not binding on the Department.
Yours truly,
G. Thornleyfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch