Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether a specified member's partnership interest continues to be an excluded interest after the general partnership transfers it commercial property to a limited partnership and becomes the limited partner of the new partnership.
Position:
No.
Reasons:
The general partnership will no longer own the property it owned on February 22, 1994 and will no longer be carrying on the business that was being carried on before the property was transferred. The specified members of the partnership will have gone from carrying on an active business to investing in a partnership.
961889
XXXXXXXXXX A. Seidel
Attention: XXXXXXXXXX
July 12, 1996
Dear Sirs:
Re: Excluded Interest in a Partnership
This is in reply to your letter dated May 21, 1996 with respect to the interpretation of "excluded interest", within the meaning thereof in subsection 40(3.15) of the Income Tax Act (the "Act"), in the context of a general partnership that transfers its commercial property to a newly formed limited partnership and where the general partnership interests were previously excluded interests.
The situation described in your letter appears to relate to specific taxpayers and actual fact situations. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments with respect to subsection 40(3.15) of the Act.
In general terms, subsection 40(3.1) of the Act deems a specified member of a partnership to recognize a gain from a disposition, any negative amount in the adjusted cost base of the specified member's partnership interest. There is an exception to the application of subsection 40(3.1) of the Act if the specified member's partnership interest is an excluded interest under subsection 40(3.15) of the Act.
Subsection 40(3.15) of the Act requires that the partnership actively carry on a business that was carried on by it throughout the period beginning February 22, 1994 or that the partnership earn income from a property owned by it since February 22, 1994 and there has not been a substantial contribution of capital or a substantial increase in the indebtedness of the partnership.
Upon the transfer by a general partnership of its business or property, which it carried on or owned since February 22, 1994, to a newly formed limited partnership pursuant to subsection 97(2) of the Act and the general partnership will be the only limited partner and a Canadian corporation will be the general partner of the new limited partnership, it is our view that the general partnership will no longer own the property that was owned on February 22, 1994 (limited partnership interest being substituted for the commercial property upon the transfer), nor will it be carrying on the same business that was being carried on before the property was transferred to the limited partnership.
The general partnership will have gone from operating the commercial property to investing in a limited partnership. Although the general partnership may be considered to be carrying on a business, it would not constitute "actively carrying on a business" as required by subsection 40(3.15) of the Act. By analogy to the Tax Court decisions in Gordon Grocott v. Her Majesty the Queen, 96 DTC 1025, and Robinson Trust et al. v. Her Majesty the Queen, 93 DTC 1179, and the Federal Court-Trial Division decision in Robert M. Randall v. Her Majesty the Queen, 85 DTC 5208, a limited partner could be carrying on business even though that limited partner had no active part in the control of the business or the day-to-day operations of the limited partnership (the Gordon Grocott case) and did not "participate actively" in the business (the Robert M. Randall case), but that limited partner would not be considered to be carrying on an "active business" where the limited partner does not exercise a management role in the partnership (the Robinson Trust case).
These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2 and are therefore not binding on Revenue Canada.
Yours truly,
for Director
Resources, Partnerships & Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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