Revenue Canada Taxation
Head Office
XXX
C. Higgins (613) 957-2103
MAY 3 1988
Dear Sir:
This is in reply to your letter of March 10, 1988 concerning your request for our opinion of the phrase "all or substantially all" and the term "primarily" for purposes of the definition "small business corporation" ("SBC") as defined in subsection 248(1) of the Income Tax Act (the "Act"). In addition, you have requested our comments on a hypothetical situation outlined in your letter, as it relates to the definition of a "qualified small business corporation share" in section 110.6 of the draft legislation made public in April 1988.
Our Comments
The Department has consistently taken the view that the references in the Act to the phrase "all or substantially all" means at least 90% of whatever is being measured. In our view, however, it would be inappropriate to adopt a universal standard whether it is based on quantity, cost, fair market value or some other measurement, as the facts of each particular situation should normally dictate what basis is most appropriate in the circumstances.
In paragraph 8 of IT-147R2 and paragraph 5 of IT-486R , the Department interprets the term "primarily" to mean principally, chiefly, or greater than 50%. Whether or not an active business is carried on primarily in Canada is a question of fact. Factors such as the type of business, sales, net profit, number of employees, gross assets and net assets are examples of factors that are taken into account in determining whether a corporation's business is being carried on primarily in Canada. Again, all the circumstances will be the deciding factor in each case.
Subsection 110.6(1) of the draft legislation released in April, 1988 provides that a "qualified small busines corporation share" of an individual at any time means a share of the capital stock of a corporation that, ...
(b) throughout the 24 months immediately preceding that time, was not owned by anyone other than the individual or a person or partnership related to the individual, and ...
With respect to the 24 month period provided for in the draft legislation, the Department of Finance has indicated that this period in effect applies for the time that is the lesser of
(a) 24 months, or
(b) the length of time the particular corporation has been in existence.
Furthermore, in our view, the words of the draft legislation support this position. As a result, if the draft legislation is enacted as presently worded, it is possible that a share in a newly incorporated company could qualify as "qualified small business corporation share".
Proposed Reorganization
Based on the facts provided in your letter relating to the proposed reorganization of "Oldco", we are unable to determine whether "Newco" will satisfy all of the other requirements contained in the draft legislation. Also, based on your description of the proposed reorganization, it is our view that this reorganization would not satisfy the requirements of paragraphs 55(3)(a) and (b) of the Act and therefore will be subject to the provisions of subsection 55(2) of the Act.
We trust these comments will be of assistance.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch