February 1, 1989 B. Dwyer (613)957-2744
Re: Definition of Small Business Corporation
This is in reply to your letter dated January 13, 1989 in which you requested our comments with respect to the following situation:
Mr. A owns corporation A and Mrs. A owns corporation B (a small business corporation). The sole asset of corporation A is a $200,000 receivable from corporation B.
You have asked for our opinion on whether corporation A would qualify as a "small business corporation" ("SBC") as that term is defined in subsection 248(1) of the Income Tax Act (Canada) (the "Act").
In determining whether an SBC is connected with another corporation for purposes of paragraph (b) of the definition of small business corporation, one must apply subsection 186(4) of the Act on the assumption that the SBC is a "payer corporation". In determining control for purposes of subsection 186(4) of the Act, it is our view that the extended definition of control set out in subsection 186(2) of the Act is applicable. However, The $200,000 receivable must qualify as a "bond, debenture, bill, note, mortgage, hypothec or similar obligation" issued by corporation B. Bonds, debentures, bills, notes, mortgages and hypothecs are all instruments that evidence debt and that have been issued by the debtor. If the $200,000 receivable is a mere receivable, it may not qualify as such an instrument or as a similar obligation.
If a qualifying debt was created for the purpose of qualifying corporation A as a small business corporation prior to a sale of the shares of corporation A, section 245 of the Act may have application.
The comments set out in this letter are of a purely general nature and do not take into account considerations that might arise in the context of a specific transaction. In accordance with paragraph 24 of Information Circular 70-6R, the comments expressed herein do not constitute advance income tax rulings and consequently are not binding on the Department.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch