CRA states that limited partners carry on the trading business of their LP for purposes of the s. 39(4) capital gains election

A hedge fund, which is a limited partnership, engages in trading of Canadian securities which would cause it to be considered to be a trader or dealer in securities – but its trading gains are allocated to its Canadian limited partners. If they have made the s. 39(4) election, are those gains deemed to be capital gains? CRA responded:

[A] limited partner of an LP will be considered to be carrying on the business of the LP in applying subsections 39(4) and 39(5). … [P]aragraph 11 of… IT-479R … could be useful in determining…whether a limited partner of an LP in the described situation is a trader or dealer in securities for the purposes of subsection 39(5).

This might be saying that because the LP is carrying on a trading business, each limited partner thereby would be considered to be a trader or dealer in securities respecting the trading gains allocated to it, so that the election would not be available. Such a view would be debatable, given that s. 39(4.1) only deems the partners to own and dispose of the LP securities and does not deem them “to be carrying on the business of the LP” as asserted by CRA. Furthermore, although s. 96(1)(f) deems trading income of the LP to be trading income of the partners, it does not go on to deem the partners to be traders.

Neal Armstrong. Summary of 20 June 2016 T.I. 2014-0559961E5 Tr under s. 39(4.1).