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 partnership interest is qualified property for the purpose of paragraph 219(1)(l) of the Act?
Position: No
Reasons: Even though the partners are considered to be carrying on the business of the partnership, the partnership interest cannot be considered to be property used by the partners for the purpose of gaining or producing income from a business.
XXXXXXXXXX 2000-000621
September 20, 2001
Dear XXXXXXXXXX:
Re: Section 219 of the Income Tax Act (the "Act")
We are writing in reply to your letter of February 4, 2000 in which you requested our opinion as to whether the partnership interest in the situation described below is considered "qualified property" for the purposes of paragraph 219(1)(l) of the Act.
The situation involves a non-resident corporation which has an interest in a general partnership which carries on business in Canada. The non-resident corporation contemplates selling its partnership interest to a Canadian corporation which is a subsidiary wholly-owned corporation of the non-resident corporation.
The situation outlined in your letter appears to involve actual proposed transactions and identifiable taxpayers and, therefore, should be the subject of an advance income tax ruling. Confirmation as to the income tax consequences of proposed transactions will only be given in the context of an advance income tax ruling. The procedures for making a request for an advance income tax ruling are outlined in Information Circular 70-6R4, dated January 29, 2001, issued by Canada Customs and Revenue Agency. We can, however, offer the following general comments.
"Qualified property" is described under paragraph 219(1)(l) of the Act as property used by the non-resident corporation for the purpose of gaining or producing income from a business carried on by the non-resident corporation in Canada immediately before the time of the disposition of such property by that non-resident corporation to a "qualified related corporation", within the meaning assigned by subsection 219(8) of the Act.
Where a taxpayer has an interest in a partnership which carries on business, our general position is that the taxpayer carries on jointly with the other partners of the partnership the business carried on by the partnership. This position is consistent with the generally accepted definition of "partnership" which is that a partnership is the relationship that subsists between persons carrying on a business in common with a view for profit. However, in our opinion, a partnership interest would not be considered property used by the partner for the purpose of gaining or producing income from the business carried on by him through the partnership. It is therefore our opinion that in the situation outlined in your letter the partnership interest is not considered qualified property for the purpose of paragraph 219(1)(l) of the Act.
With respect to your reference to the definition of "small business corporation", on several occasions we have expressed our view publicly that for the purpose of the definition of "small business corporation" under subsection 248(1) of the Act, it is the underlying partnership's assets (to the extent of the corporate partner's interest therein) that are used in determining whether all or substantially all of the corporate partner's assets are used in an active business. Provided that these assets are used principally in an active business carried on primarily in Canada by the partnership, they will qualify as being used by the partner in an active business carried on by him primarily in Canada. This position is consistent with the wording of the definition of "small business corporation" in subsection 248(1) of the Act where, because of the words "is attributable to assets used ...", one can look at the underlying assets in determining whether the "all or substantially all" test of the value of the assets of the corporation is met. Accordingly, this can be distinguished from the paragraph 219(1)(l) issue discussed above.
As stated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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