Estate of Edward Reilly v. The Queen, 2007 TCC 404, considers whether shares of a corporation owned by an individual were qualified small business corporation shares (QSBCS) at the time of his death. If the shares had been QSBCS, the individual’s estate would have been entitled to claim the capital gains exemption to eliminate the gain the individual realized on death in respect of the shares.
The Court concluded that the shares were not QSBCS because a subsidiary of the corporate issuer held too many redundant assets:
There is no evidence that the cash and marketable securities held by [the subsidiary] were necessary or even important for the carrying on of its small active businesses. Or in the words of [Ensite Limited v. The Queen, [1986] 2 S.C.R. 509, 1986 CanLII 41], there is no evidence that the cash and marketable securities were held “to fulfill a mandatory condition precedent to trade”.
The decision is unsatisfying because it seems to use “book value” and “fair market value” interchangeably. Only the latter is relevant to the QSBCS test. In addition, the Court gave no consideration to off-balance sheet items like goodwill, probably because the taxpayer provided no evidence about its value. The amount in issue was not large, but it might have been worth it to present at least some evidence about goodwill.
