13 June 2000 Internal T.I. 2000-0001227 - Partnership definition

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:

Determining whether the relationship of certain investors in respect of the acquisition and rental of apartment buildings was a partnership, and if so, whether a limited or general partnership.

Position:

Relationship was a general partnership.

Reasons:

There was no executed written agreement confirming that a limited partnership was created under the Limited Partnership Act. Also, no evidence was presented to suggest that the requirements of subsection 96(2.4) of the Income Tax Act would apply to cause a particular investor to be a limited partner.

Based on the Continental Bank Leasing case (98 DTC 6505), there was sufficient indicia to support the existence of a general partnership in the particular relationship. The payment of actual cash distributions supported the intention of the business plan to make such distributions from positive cash flows from the operation of the business. This further supported that profit making and profit sharing was an ancillary purpose of the relationship, according to the Continental Bank case.

			June 13, 2000

	XXXXXXXXXX  Tax Services Office	Resources, Partnerships and
	Director	  Trusts Division
F. B. Fontaine, FCCA
	Attention:	XXXXXXXXXX 	(613) 957-4364

			2000-000122

Determination of Existence of Partnership
XXXXXXXXXX 

This is in reply to your electronic mail transmission dated January 10, 2000 concerning XXXXXXXXXX, its related corporations, the shareholders of those corporations and their relationships with investors in various real estate deals. You have specifically asked us to address whether or not a partnership exists in this factual situation, and if so, whether it is a general or limited partnership.

Based on telephone conversations (Fontaine/XXXXXXXXXX), the following comments represent our understanding of the facts of which we have very little evidence and this makes our analysis very difficult.

XXXXXXXXXX

Our Comments

What Determines a General Partnership and a Limited Partnership

A. For the purpose of determining whether a particular arrangement is a partnership, IT-90 recites that a "partnership is the relation that subsists between persons carrying on a business in common with a view to profit" and states that for guidance on whether a particular arrangement at a particular time constitutes a partnership, reference should be made to the relevant provincial law on the subject, and such law will be viewed as persuasive by the Agency. Pursuant to section 46 of the Ontario Partnership Act (the "OPA"), this definition applies to general partnerships under the OPA and to limited partnerships under the Limited Partnership Act (the "LPA").

B. It is not essential for parties to recognize that they are forming a partnership. A partnership formed pursuant to the OPA would be considered to be a general partnership. The determination of whether such a partnership exists does not depend on having a written partnership agreement. A partnership may be created by tacit agreement or by inference from the actions of the parties. In determining that a partnership exists, Canadian jurisprudence considers that the intention of the parties is of great importance even though the legislative test appears to be objective as to whether or not a business has in fact been carried on. Without such intention, express or implied, the courts are not likely to infer partnership even if there was considerable "carrying on of business".

C. In the case of Porter and Sons v. J. H. Armstrong (1926) S. C. R. 328, Mr. Justice Duff laid down the test that "partnership arises from contract, evidenced either by express declaration or by conduct signifying the same thing...".

D. Also, in the case of Continental Bank Leasing v. Canada 98 DTC 6505, Bastarache J. commented that the indicia of a partnership include the contribution by the parties of money, property, or other assets to a common undertaking, a joint property interest in the subject-matter of the adventure, the sharing of profits and losses, a mutual right of control or management of the enterprise, the filing of income tax returns as a partnership and joint bank accounts.

Accordingly, while both a general partnership and a limited partnership must comply with the above described definition and while the existence of a general partnership may be based on intention of the parties supported by their conduct, the formation of a limited partnership is determined differently.

E. Subsection 3(1) of the LPA provides that a limited partnership is formed when a declaration is duly filed with the Registrar of Partnerships. This provision provides, among other things, that the declaration shall be signed by persons desiring to form the limited partnership and that it shall state:

(i) the name of the partnership,

(ii) the names and addresses of the partners, including those of the general and limited partners,

(iii) the amount of contribution made by each limited partner, and

(iv) the nature of the business and the address of the principal place of business.

Therefore, for the purposes of the LPA, if no such declaration was filed, it is our view that a particular relationship would not be a limited partnership, notwithstanding the intention or conduct of the parties. We are not aware that such declaration was duly filed. The conduct of a group of persons involved in a particular activity, however, in the absence of an agreement, would assist in determining the existence of a general partnership.

Becoming a Limited Partner under Subsection 96(2.4) of the Act

F. (i) Provided a partnership exists (for the purposes of the OPA or the LPA), subsection 96(2.4) of the Act provides that a member of a partnership (including a general partnership), would be a limited partner if certain criteria set out in that subsection are met. The provision does not deem a partnership to be a limited partnership. (These criteria are generally for the purposes of restricting investment tax credits and losses). Based on the evidence available to us, XXXXXXXXXX Any partner's interest acquired after February 25, 1986 in any such partnership would not be an "exempt interest" under subsection 96(2.5) and could be subject to subsection 96(2.4). However, we do not have documentary or other evidence to support that the requirements in paragraphs 96(2.4)(a) to (d) would be met to determine any particular investor to be a limited partner under that provision. For instance, we are not aware of any executed limited partnership agreement or that any investor received any "benefit" that would meet the "purpose" test described in paragraph 96(2.2)(d) of the Act.

(ii) For a partnership that was created before February 26, 1986, it is unlikely that it would meet the test for "exempt-interest" status by a partner, pursuant to paragraph 96(2.5)(c), because of "substantial" borrowings by the partnership to finance the set up of other partnerships.

Satisfying the Various Components of the Definition of "Partnership"

G. For the purposes of determining the nature of the relationship in the particular situation, an examination of the components of the definition of "partnership" would be useful.

Carrying on Business

(i) The definition of "business" in section 1 of the OPA "includes every trade, occupation and profession". Based on the facts presented to us and on the definition of "partnership", it is our view that the operation of the buildings would constitute a "business" in accordance with the definition of that latter term. There were many activities undertaken with regard to the buildings that would indicate that a business was being carried on by the parties. Those activities would include the acquisition of the buildings, acquiring the mortgages, the rental of suites in the buildings, the management of the buildings, the refinancing of the mortgages held on the buildings, etc. Some of these activities were cited in the Continental Bank case by Bastarache J. in describing the term "business".

In Common

(ii) According to Bastarache J., in order for a partnership to exist, it must be shown that two or more people carried on the business. In the given situation, the short agreement and cash distributions made to the parties would support that XXXXXXXXXX and the investors were the owners of the buildings. Accordingly, the activities described in (i) above that were carried on in the operation of the buildings could only have been carried on in common by, or on behalf of, the owners, even under the management of XXXXXXXXXX. As Bastarache J. stated, "Various supporting documents, including correspondence with third parties, tax returns, financial statements and assignment of leases effected during the period, are consistent with the carrying on of a business in common." The judge also stated that "the fact that the management of the Partnership was given to the Managing Partner does not mandate a conclusion that the business was not carried on in common".

With a view to Profit

(iii) In the Continental Bank case, Bastarache J. also commented that simply because the parties had an overriding intention of creating a partnership for one purpose does not negate the fact that profit-making and profit sharing was an ancillary purpose. In stating that the definition of partnership would be satisfied, even where profit making or profit sharing was such an ancillary purpose, Bastarache J. cited the following extract from Lindley & Banks on Partnership:

"...if a partnership is formed with some other predominant motive (other than the acquisition of profit) ... but there is also a real, albeit ancillary, profit element, it may be permissible to infer that the business is being carried on "with a view to profit". If, however, it could be shown that the sole reason for the creation of a partnership was to give a particular partner the "benefit" of, say, a tax loss, when there was no contemplation in the parties' minds that a profit...would be derived from carrying on the relevant business, the partnership could not in any real sense be said to have been formed "with a view to profit"".

Conclusions

H. (i) Based on the evidence available to us, the necessary requirements by which a limited partnership is formed were not present. Also, we have no evidence that any one party stood to gain any particular benefit that would not have been available to the other parties in the undertaking. Our understanding is that distributions were made to all investors. Accordingly, no investor could be considered as a limited partner.

(ii) Based on the comments expressed in the Continental Bank case, it is our view that the particular indicia described by Bastarache J. were present in the particular situation for the purpose of creating a general partnership. Even if the primary purpose might have been to create a relationship to purchase many properties from which future capital appreciation might have been derived, the distributions made to the investors would assist to conclude that profit-making and profit sharing was an ancillary purpose. Paragraph 3 above reflects the intention that the business plan included the distribution of positive cash-flows from the operation of the business.

We hope the above comments will be helpful to you in resolving the matter concerning the taxpayers' relationship.

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch