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.
Principal Issues: 1. Whether modified partnership method extends to Investment Clubs whose members are not all individuals.
Position: 1. No
Reasons: 1. Administrative position only extended to consortium of individual investors per IC73-13; Intention was not to extend beyond those thought to have needed a concession for ease of reporting. Also legal form - re ownership of undivided interest in investments should not be ignored for all investment clubs.
Lena Holloway, CA
XXXXXXXXXX 613-957-2104
2004-006650
April 28, 2004
Dear XXXXXXXXXX:
Re: Information Circular 73-13 - Investment Clubs
This is in response to your letter of March 8, 2004, relating to the use of the "modified partnership method" to report income from an investment club, as outlined in Information Circular 73-13 Investment Clubs ("IC 73-13").
Your letter enquires whether the Canada Revenue Agency (the "CRA") will allow an investment club, some members of which are corporations, the option of electing to be taxed using the modified partnership method. In your opinion, where one or two members of an investment club having a limited number of members are corporations, such a club should also have the opportunity to report income using the modified partnership basis.
Whether an investment club is a partnership or an association of investors, each owning an undivided interest in each security held by the club is a question of fact. However, if an investment club is an association of investors, IC 73-13 provides that the investors may elect to report their income as if the investment club was a partnership (the "modified partnership method"). This election is described in paragraphs 5 to 15 of IC-73-13. Under the modified partnership method, a club and its members are treated as if each member owned a partnership interest in the club instead of an undivided interest in each asset of the club. Only bona fide investment clubs may make this election. As noted in paragraph 7 of IC 73-13, an investment club will generally only be considered to be a bona fide investment club where, among other things, all of its members are individuals.
Accordingly, it is our view that an investment club which includes corporate members would not likely constitute a bona fide investment club and, therefore, could not elect to use the modified partnership method to report its income. However, we cannot provide any definitive comments without reviewing all of the facts and documentation, including the nature of the investment club, the number of investors, the type of investors, and the relevant agreements.
We trust that our comments will be of assistance
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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