Principal Issues: Will CRA's position evolve following the jurisprudence and the 2007 technical interpretation or is the "all or substantially all" test still imply a 90% threshold?
Position: We do not believe that it is necessary to modify our administrative position following the decisions reached by the tribunals.
Reasons: See letter below.
APFF FEDERAL TAX ROUNDTABLE 11 OCTOBER 2013
APFF CONFERENCE 2013
Question 3
Qualified small business shares asset tests
The concept of "all or substantially all" is used by the legislator on many occasions in the Act. This concept is used in particular in subsection 248(1) where a small business corporation ("SBC") “means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are…”
The long-standing administrative position of the CRA is that the "all or substantially all" test is satisfied where a level of 90% or more is reached.
However, several court judgments in recent years have concluded that a percentage of more than 75% may be satisfactory to achieve the "all or substantially all" test.
In Watts v. The Queen, 2004 TCC 535, for purposes of determining whether a non-resident was entitled to non-refundable tax credits, Bowman J. considered that the proportions varying from 76% to 81% of the taxpayer's income that was taxable in Canada over a period of three years could qualify as "all, or substantially all" of his Canadian income and, thus, he was entitled to non-refundable credits.
In Reluxicorp Inc. v. The Queen, 2011 TCC 336, in determining a sales tax issue, Lamarre J. found that 74.83% did not meet the "all or substantially all" test. According to Lamarre J., the legislature had used the expression "all or substantially all", which meant that it must be closer to totality than halfway between the majority and totality.
In Technical Interpretation 2007-0226261E5, the CRA stated the following:
…[T]he test of "substantially all" could, depending on the circumstances and the context, be satisfied even if the 90% level is not strictly achieved. When the 90% level is not reached, the CRA must consider each case in its particular context and determine if, in a particular situation, a threshold of less than 90% may be considered to meet the “substantially all” test.
Questions to the CRA
(a) Has the CRA's position evolved in light of the judgments of recent years and the 2007 technical interpretation of, or is it still to the effect that a level of 90% or more must be reached?
(b) Mr. X holds 100% of the common shares of Holdco, whose only asset is shares of Opco. The fair market value of Opco is $1 million. Opco's balance sheet has $1.5 million in cash, $3.5 million of active business assets and $4 million of debt. Assume that throughout the 24 months preceding the sale, the tests of 90% - 50% were satisfied by Holdco and Opco respectively on the basis of the balance sheets mentioned above. Mr. X wants to sell his Holdco shares. Consequently, immediately before selling, a dividend must be paid by Opco to Holdco and by Holdco to Mr. X in order to remove excess cash and to ensure that Opco satisfies the 90% test. The payment of this dividend, if made in a single payment, would result in Holdco no longer satisfying the 50% test for a moment in time. Conversely, paying the dividend in several installments could alleviate this problem while making the transaction unnecessarily burdensome. Is the CRA prepared to accept that, as part of a purification process, there may be a momentary breach of the SBC tests?
CRA response to Question 3(a)
According to the jurisprudence, the interpretation of the term "all or substantially all" in the Act depends on the relevant legislative provision and the facts of each case. The expression "all or substantially all" is not defined in the Act and is not determined by a simple mathematical formula.
The administrative position of the CRA is to usually consider that the "all or substantially all" test is satisfied when a level of 90% or more is reached.
However, the test of "all or substantially all" could, depending on the circumstances and the context, be satisfied even if the 90% level is not reached. Where the 90% level is not attained, the CRA must consider each case in its particular context to determine if a threshold lower than 90% could satisfy the "all or substantially all" test.
We do not believe that it is necessary to modify our administrative position in light of the decisions rendered by the courts to date.
CRA response to Question 3(b)
The capital gains deduction provided in section 110.6 may be claimed by a taxpayer who disposes of qualified small business corporation shares ("QSBCS"). A QSBCS is a share that is subject to the following three tests:
i. Test at the time of the disposition of the shares which must only be satisfied at the time of the disposition of the shares.
ii. Test respecting the holding of shares throughout the 24-month period preceding the disposition of the shares. Theoretically, this test must be performed every day or every minute during the 24-month period preceding the disposition of the shares. This test will be performed whenever the composition of the corporation’s assets changes significantly.
iii. Test of the fair market value of the corporation’s assets to which the shares relate.
These are tests of the corporation’s asset mix at the time of the sale of the shares, the holding period of the shares, and the composition of the assets of the corporation throughout the holding period.
Under subsection 248(1), a SBC means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
(b) shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the small business corporation is at that time a payer corporation within the meaning of that subsection), or
(c) assets described in paragraphs (a) and (b),
You will appreciate that the determination of a SBC's status at the time of the sale of its shares is one of fact that can only be made in the light of all relevant factors. However, we are of the view that a share of the capital stock of a SBC cannot fail to satisfy one of the above-described three tests, even if for only a moment, in order to qualify as a QSBC.
Maryann Hikspoors
952-1506
2013-049563