- On January 1, Year 1, Mr. X (and Mr. Y) exchanged their 10 (and 90) common shares of Opco for 100 (and 900) preferred shares of Opco.
- They also subscribed for 10 (and 90) participating shares and 10 (and 90) voting shares of Opco.
- On December 31, Year 2, Mr. X transferred his participating and preferred shares on a s. 85(1) rollover basis to newly-incorporated Holdco (as its only asset) in exchange for Holdco common shares.
- On November 1, Year 3, Holdco and Opco may amalgamate, prior to a sale of Amalco shares to third parties.
(a). If Step 4 does not occur, would the Holdco common shares received by X in Step 3 qualify as qualified small business corporation shares ("QSBCSs") on the assumption that the QSBC FMV tests were met?
(b). On the same assumption, would the Amalco shares so qualify?
CRA noted:
- s. 110.6(14)(f)(i) provided that, for purposes of the requirement in s. 110.6(1)(b) that the shares must not have not been owned during the 24 months preceding their disposition (the “determination time”) by anyone other than the disposing individual or a related person or partnership, such shares will be considered to have been so owned prior to their issuance unless they were issued as consideration for other shares (the “original shares”).
- however, s. 110.6(1)(e)(i) required that throughout the period beginning 24 months before the determination time and ending at the time of the share exchange (the “substitution”), the original shares were not owned by anyone other than the individual or a related person or partnership; and that s. 110.6(1)(e)(ii) required that the original share had qualified under the asset and activity test described under para. (c) during such initial period.
Regarding a sale of the shares after Step 3, CRA noted that the s. 110.6(14)(f)(i) test would be satisfied - and that, under the s. 110.6(1)(e)(i) test, throughout the portion of the 24-month period preceding such sale up to the substitution of the Opco shares for Holdco shares, such Opco shares were owned by Mr. X. CRA noted that the s. 110.6(1)(e)(ii) test would be required to be satisfied by Holdco from the time of the share exchange, but also by Opco during the preceding period starting 24 months before the sale of the Holdco shares and ending with the share substitution.
Regarding a sale of the shares after Step 4, CRA indicated that the test in s. 110.6(14)(f)(i) would be satisfied since “Amalco would issue the shares of its capital stock in consideration for the shares of capital stock of Opco (to Mr. X and Mr. Y) and of the capital stock of Holdco (to Mr. X).”
Regarding the s. 110.6(1)(e)(i) requirement applicable to any sale of Amalco shares by Mr. X, CRA indicated that Amalco shares that were substituted for his Holdco common shares had not been held by anyone other than him, and that, prior to being replaced by Holdco shares, the original Opco share had not been owned by anyone other than him – and in this regard, stated that s. “110.6(1)(e) can apply respecting multiple substitutions.”
Regarding the s. 110.6(1)(e)(ii) requirement applicable to any sale of Amalco shares by Mr. X which replaced the Holdco common shares, it would be necessary for Amalco to satisfy the s. 110. 6(1)(c) test from the time of its issuance of shares to Mr. X but also for Holdco to satisfy the same test for the period beginning with the Step 3 transfer and ending with the amalgamation, and for Opco to satisfy that test for that portion of the period beginning 24 months before the sale and ending with the Step 3 transfer.
Similar considerations applied to a sale by Mr. Y, except that his Amalco shares replaced only Opco shares.