Principal Issues: Whether an operating corporation and a sister corporation that owns a building that is leased to the operating corporation are "relevant group entities" towards each other.
Position: The operating corporation would be a relevant group entity with respect to the disposition of shares of the sister corporation owning the building, but not the other way around.
Reasons: The law and previous positions.
XXXXXXXXXX 2024-103664 S. Lemieux
April 29, 2025
XXXXXXXXXX,
Subject: Application of the concept of "relevant group entity" in a hypothetical context
This is further to your letter dated September 9, 2024 in which you requested our opinion with respect to the concept of "relevant group entity", as defined in subsections 84.1(2.31) and 84.1(2.32) of the Income Tax Act, R.S.C. 1985, c. 1, (5th Supp.) (the "Act"). Unless otherwise indicated, all legislative references herein are to provisions of the Act.
Background
You have presented us with the following hypothetical situation:
- Opco is a Canadian-controlled private corporation ("CCPC") as defined in subsection 125(7);
- Opco is a small business corporation as defined in subsection 248(1);
- Opco operates a business selling telecommunications services;
- Opco is owned by Mr. A and Ms. B;
- Mr. A is the spouse of Ms. B. They are therefore related persons within the meaning of subsection 251(2);
- Mr. A and Ms. B each hold 50 Class A shares (i.e., voting and participating shares) in the capital stock of Realtyco;
- Realtyco is a CCPC;
- Realtyco owns an immovable that is entirely leased to Opco, which uses the immovable exclusively in the active operation of its business in Canada;
- all of the issued and outstanding shares of the capital stock of Realtyco are held by Mr. A (i.e. 100 common, voting and participating shares);
- there are no debts, advances or shares between Realtyco and Opco and there were no such debts, advances or shares between the two corporations at any time relevant for the purposes hereof;
- Holdco is a CCPC;
- all of the issued and outstanding shares of the share capital of Holdco are held by Mr. C (i.e. 100 common, voting and participating shares);
- Mr. C is the adult child of Mr. A and Ms. B, and they are therefore related for the purposes of the Act;
- Ms. B and Mr. A wish to dispose, to Holdco, of all the shares they hold in the capital stock of Opco for non-share consideration of $2,000,000;
- Mr. C is an employee of Opco and wishes to take over the business;
- the vendors and the purchaser will use the new relief measures provided for in paragraph 84.1(2)(e). All the conditions set out in either subsection 84.1(2.31) or 84.1(2.32) will be satisfied. The vendors will use their capital gains deduction under subsection 110.6(2.1) following the sale of the shares of the capital stock of Opco.
Your Questions
You submitted the following two questions:
(1) For the purposes of applying the various tests in subsections 84.1(2.31) and 84.1(2.32) to the sale of the shares of the capital stock of Opco, will Realtyco be considered a relevant group entity within the meaning of subparagraphs 84.1(2.31)(c)(iii) and 84.1(2.32)(c)(iii)?
(2) If Mr. A wished to sell the shares of the capital stock of Realtyco to Holdco, would Opco be considered a relevant group entity within the meaning of subparagraphs 84.1(2.31)(c)(iii) and 84.1(2.32)(c)(iii)?
You suggested that Realtyco would not be a relevant group entity in connection with the sale of Opco's shares to Holdco.
On the other hand, you suggest that if Mr. A wished to sell the shares of the capital stock of Realtyco to Holdco, Opco would be a relevant group entity with respect to the sale of the shares of the capital stock of Realtyco to Holdco.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Our comments deal exclusively with the question of whether a corporation is a relevant group entity, with respect to the sale of shares of the other corporation that would otherwise qualify as qualified small business corporation shares ("QSBCSs") within the meaning of the definition provided in subsection 110.6(1). Beyond such qualification, all the other conditions set out in subsection 84.1(2.31) or subsection 84.1(2.32) must also be satisfied with respect to the sale of shares of the capital stock of a corporation, including in particular the criteria set out in paragraphs 84.1(2.31)(a) and 84.1(2.32)(a). The latter requires that the taxpayer has not previously, at any time after 2023, sought an exception in respect of a disposition of shares that derived their value from an active business that is relevant to the determination of whether the subject shares are QSBCSs.
With respect to Question (1), we agree with your conclusion that Realtyco would not be a relevant group entity in relation to the sale of shares of the capital stock of Opco to Holdco. We refer you to document 2024-101064, which deals with a similar issue and sets out our position in greater detail.
With respect to Question (2), we have assumed that the immovable is Realtyco's only asset, that Realtyco's business is limited to leasing the building and that Realtyco has no employees. Our Directorate's longstanding position is that shares of the capital stock of a corporation holding such an immovable may be QSBCSs where the immovable is leased to a related corporation, the related corporation uses the building in its active business, and all other conditions for qualification are satisfied. Thus, to the extent that Opco carries on an active business and such business is relevant to the qualification of the shares of the capital stock of Realtyco as QSBCSs, we are of the view that Opco would be a "relevant group entity" within the meaning of subparagraphs 84.1(2.31)(c)(iii) and 84.1(2.32)(c)(iii), in connection with the disposition of shares of the capital stock of Realtyco.
We hope you find our comments helpful.
Best regards,
Jean Lafrenière LL. B, LL. M. Fisc.
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch