25 November 1999 Internal T.I. 9903647 - PARTNERSHIP INTEREST

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: When subsection 14(1.1) applies can the eligible capital property become a taxable Canadian property?

Position: No

Reasons: The law.

		November 25, 1999

	Montreal TSO	HEADQUARTERS
	International Division	Reorganizations and
		  International 			Division
	Attention:  Mary Seccareccia	Michael Cooke
(613) 946-3259

		990364

Disposition of a Partnership Interest in a Farm Property

This is in reply to your facsimile memorandum dated February 11, 1999 wherein you requested our views as to whether the application of subsection 14(1.1) of the Income Tax Act (the "Act") changes or converts an "eligible capital property" into a "taxable Canadian property" for the purposes of the Act.

Based on the information contained in your above noted memorandum we understand that two individuals, Mr. and Mrs. A, along with their two adult children own units (one each) in a farm partnership which owns a milk quota. The milk quota owned by the partnership is considered to be an "eligible capital property" within the meaning of that term assigned by section 54 of the Act. Mr. and Mrs. A ceased to be Canadian residents sometime in 1997 or 1998. However, since more than 50% of the FMV of the partnership's property is made up of the milk quota it appears that the partnership interest would not, but for the issue in question, be considered as a "taxable Canadian property" under subparagraph 115(1)(b)(vii) such that Mr. and Mrs. A would have been considered to have disposed of their respective partnership interests pursuant to paragraph 128.1(4)(b) of the Act.

Your question is whether the application of subsection 14(1.1) of the Act would change or convert an "eligible capital property" into a "taxable Canadian property" for the purposes of the Act such that the deemed disposition pursuant to paragraph 128.1(4)(b) of the Act would not be required.

Our Comments

Subparagraph 14(1)(a)(v) includes in the business income of a taxpayer the excess portion of any negative balance of cumulative eligible capital that arise on the disposition of eligible capital property in the year (after amounts previously deducted by the taxpayer under paragraph 20(1)(b) are recaptured and included in the business income of the taxpayer under subparagraph 14(1)(a)(iv)). Subsection 14(1.1) of the Act provides, inter alia:

"For the purposes of section 110.6 and of paragraph 3(b) as it applies for the purpose of that section, an amount included under subparagraph (1)(a)(v) in computing a taxpayer's income ... from a business is deemed to be a taxable capital gain of the taxpayer ... from the disposition ... of qualified farm property...".

Subsection 14(1.1) is intended to allow an individual resident in Canada to claim the capital gains exemption for the portion of the gain that is attributable to dispositions of qualified farm properties that are eligible capital properties such as farm milk quotas.

While paragraph 14(1)(a) only applies if the taxpayer was resident in Canada throughout the year, similar to subsection 110.6(5) of the Act which applies for the purposes of subsections 110.6(2) and (2.1), subsection 14(8) of the Act deems an individual who has either ceased to be or has become a resident in Canada in the year, as the case may be, to be considered as resident in Canada throughout the year for the purposes of paragraph 14(1)(a) where the individual was either resident in Canada throughout the immediately preceding year or throughout the immediately following year, as the case may be.

It is our view that where subsection 14(1.1) applies to deem an amount included in the individual's income under subparagraph 14(1)(a)(v) to be treated as a "taxable capital gain", such treatment is only for the purposes of section 110.6 and paragraph 14(3)(b) as it applies for the purpose of that section (i.e., the reference here to "section" is to section 110.6). It does not deem an eligible capital property to be a capital property and therefore, where eligible capital property, such as a milk quota, is disposed of and subsection 14(1.1) applies such property continues to be eligible capital property for all other purposes of the Act.

Based on the facts in your memorandum while Mr. and Mrs. A would, by reason of paragraph 128.1(4)(b), be deemed to have disposed of each property owned by them, including their respective interests in the partnership, immediately before the time when each of them ceased to be resident in Canada (unless such property was excluded under subparagraphs (i) to (vi)) subsection 14(1.1) of the Act would have no application to either of them (as far as the milk quota is concerned) since the milk quota is owned by the partnership and not the individuals for the purpose of paragraph 128.1(4)(b).

We would also like to point out that there are certain proposed changes to paragraph 128.1(4)(b) that were last introduced on December 23, 1998 (applicable to changes in residence of an individual occurring after October 31, 1996) such that there is no longer any specific exclusion or reference in paragraph 128.1(4)(b) to property that is taxable Canadian property. Instead the specific exclusions from the deemed disposition rules are listed in subparagraphs (i) to (xii). Under proposed subparagraph 128.1(4)(b)(ii), for example, eligible capital property in respect of a business carried on by an individual in Canada through a permanent establishment ("PE") in Canada at the particular time will be excluded from the deemed disposition rules. Therefore, where an individual carries on a farming business in Canada through a PE and owned milk quotas used in that business at the time he/she ceased to be resident then such property would not be subject to the deemed disposition rules under proposed subparagraph 128.1(4)(b)(ii).

Based on the facts in Mr. and Mrs. A's situation under these proposed changes they would still be deemed to have disposed of their respective interests in the partnership immediately before the time each of them ceased to be resident in Canada.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 819-994-2898. The severed copy will be sent to you for delivery to the client.

We trust the above comments will be of assistance.

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch