Pursuant to the Income Tax Act, to be eligible for the capital gains exemption, the qualified small business corporation share definition includes a requirement that it be held by the taxpayer, or a party related to the taxpayer “throughout the 24 months” preceding sale.

Under the circumstances, can an 18th month old beneficiary of a family trust receive a distribution of otherwise qualifying small business corporation shares, sell them the next day and be eligible for the capital gains exemption?

In a recent case, the Canada Revenue Agency said no because the beneficiary was less than 24 months old at the time of sale so the beneficiary could not be eligible for the capital gains exemption because of the 24 month holding period requirement. The taxpayer appealed to the Tax Court of Canada.

Interestingly, the issue before the judge was whether the requirement that shares held by the taxpayer or persons related to the taxpayer for a 24 month period prior to the disposition is satisfied by taking into account the several months before the beneficiary’s birth. The agreed statement of facts for the case included an assertion the appellant beneficiary was conceived about 9 months earlier.

The case was heard in the Province of Quebec. By applying the Quebec Civil Code and making reference to law codified during the Justinian and Napoleonic eras, the judge was satisfied that the period prior to the taxpayer’s birth and after conception can be included in the determination of the 24 month holding period.

However, in the Judge’s opinion, this determination was moot because the “throughout the 24 months” test is applied by looking at who owned the shares in question during the 24 month period and determining whether they were related at the time of disposition. It did not matter in the judge’s opinion whether or not they were related at the beginning of the 24 month period. The Judge noted that his opinion would be the same for example if the fact situation involved two persons who became spouses during the 24 month period but he is also cautioned against “abusive” application of the related party status.

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