21 November 1989 Income Tax Severed Letter AC58755 - Stock Split

19(1)                                        5-8755
                                             R. B. Day
                                             (613) 957-2136

November 21, 1989

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We are writing in reply to your letter of September 22, 1989, wherein you requested our views as to whether the stock split, described in your letter, would disqualify the shares as being "qualified small business corporation shares", as defined in subsection 110.6(1) of the Income Tax Act, because of the holding period requirement.

Our understanding of the situation described in your letter is as follows:

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Tour analysis of the relevant provisions in the Act, along with the Department's position set out in IT-65 , is as follows:

For a share to qualify as a share of a qualified small business corporation, a "holding period test" must be met as the share must be:

"a share of the capital stock of a corporation that throughout the 24 months immediately preceding the determination time, was not owned by anyone other than the individual or a person or partnership related to the individual..."

However, paragraph 110.6(14)(f) provides the following::

"shares issued after June 13, 1988 by a corporation to a particular person... shall be deemed to have been owned immediately before the issue by a person who was not related to the particular person ...unless the shares were issued

(i) as consideration for other shares, or

     (ii) as part of...a series of transactions in which the      
          person...disposed of property to the corporation that 
          consisted of all or substantially all of the assets
          used in an active business carried on by that person...

If a stock split results in a corporation issuing shares, then a literal reading of the paragraph may disqualify the share as being a share of a qualified small business corporation. This is so because criteria (ii) is clearly not met an criteria (i) may not be met since the shares received were issued as a split of the existing share and not as consideration for other shares

         24(1)IT-65
,  "Stock splits and Consolidations" provides the following: 
         "Where all the shares of a class of stock of a
corporation are replaced by a greater or lesser number of shares
of the same class of stock of the same corporation in the same
proportion for all shareholders, in circumstances where there is
no change in the total capital represented by the issue, there is
no change in the interests, rights or privileges of the
shareholders and there are concurrent changes in the capital
structure of the corporation or the rights and privileges of
other shareholders, no disposition or acquisition is considered
to have occurred".

In this situation,

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Our Comments

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In conclusion, we are in basic agreement with the conclusions reached in your letter. We hope these comments are of assistance.

Yours truly, for Director Business and General division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch