Revenue Canada Taxation principal
D. Turner (613) 957-2139
FEB 10 1989
Dear Sirs:
Re: Definition of "Qualified Small Business Corporation Share"
This is in reply to your letter of December 16, 1988, concerning the definition of a "qualified small business corporation share".
You have described a situation in which a parent company's shares would fail to qualify as "qualified small business corporation shares" due to a subsidiary company, having issued a large cash dividend to the parent company. As you felt that this was not the intention of the legislation you asked the following questions:
a) for the purposes of subsection 110.6(1) of the Income Tax Act (the "Act") could the dividend receivable by the parent be considered a bond, debenture, bill, note, mortgage, hypothec or similar obligation.
b) for the purposes of subsection 110.6(1) of the Act could the dividend receivable be considered part of the underlying share and not a separate asset.
c) For the purposes of subsection 110.6(1) of the Act should assets owned by a subsidiary and owed to a parent not be counted both as assets of the subsidiary and of the parent. This apparent "double" counting of assets not used in the active business causes the parents shares not to be "qualified small business corporation shares".
d) If the answer to the above three questions is negative, would it be possible for administratitve relief to occur where a corporation's assets meet the spirit and intent of the definition but not the technical requirements.
Our opinions related to the above questions are as follows:
a) Bonds, debentures, bills, notes, mortgages, and hypothecs are instruments that evidence a debt or loans and are issued by the borrower. Such debts or loans are repayable at maturity. A dividend payable is not an obligation to repay funds at a maturity date nor an instrument that evidences debt. It would more appropriately be compared to interest payable on such debt. Thus our opinion is that the dividend payable could not be considered a "similar obligation" as referred to in subsection 110.6(1) of the Act.
b) In our opinion, a dividend receivable could not be considered part of the underlying shares. Dividends are normally paid to an owner of record on a specific date, after that date the shares could be sold separately from any rights to the dividends. Thus the shares and related dividends must be treated as separate assets.
c) As there is no provision in the legislation relating to possible "double" counting of assets it is our opinion that the wording of the legislation must be followed and the total assets of each corporation considered when evaluating each corporation's qualifications.
With respect to your first question, as the company can avoid the problem by simply paying the dividend at the time it is declared rather than at a later date, it is not felt that administrative relief is warranted. You may wish, however, to bring your concern to the attention of the Minister of Finance.
We trust that our comments will assist you in this matter.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch