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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Is a subsection 39(4) election by a member of a partnership, that is a member of a second partnership, applicable to Canadian securities disposed of by the second partnership?
Position: No.
Reasons: Subsection 39(4.1) does not deem property owned and disposed of by the second partnership to be owned and disposed of by the members of the upper-tier partnership.
Bob Naufal, CMA
XXXXXXXXXX (613) 957-2744
2002-014142
February 12, 2003
Dear XXXXXXXXXX:
Re: Multi-tiered partnerships
We are writing in response to your letter of May 17, 2002 wherein you requested our opinion on the application of subsections 39(4) and (4.1) of the Income Tax Act (the "Act") to multi-tiered partnerships. Your letter describes a situation whereby a limited partnership (the "Top Partnership") holds an interest as a general partner in a second partnership (the "Bottom Partnership"). The Bottom Partnership will acquire "Canadian securities" as defined in subsection 39(6) of the Act. You have asked us if an election under subsection 39(4) by a member of the Top Partnership would apply to the Canadian securities owned and disposed of by the Bottom Partnership.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. However, we are prepared to provide you with the following general comments.
Subsection 39(4) permits certain taxpayers to elect to treat all of their Canadian securities as capital property, thereby ensuring that any gain or loss on such dispositions will be treated as a capital gain or loss. A "Canadian security" is defined in subsection 39(6). Subsection 39(5) of the Act excludes certain taxpayers from making an election under subsection 39(4). These include traders or dealers in securities, non-residents and financial institutions as defined in subsection 142.2(1) of the Act (generally, a bank, trust company, credit union, insurance corporation or corporation whose principal business is lending money or factoring commercial paper).
A partnership is not entitled to make a subsection 39(4) election. However, in determining the income of a taxpayer that is a member of a partnership, subsection 39(4.1) of the Act provides that subsections 39(4) and 39(5) apply as if the Canadian securities owned and disposed of by the partnership are owned and disposed of by the taxpayer. Accordingly, subject to subsection 39(5), a member of a partnership (other than another partnership) may make an election under subsection 39(4) that applies to the Canadian securities disposed of by the partnership. The effect of this provision is that, to the extent that an amount is allocated to a partner in respect of the Canadian securities, the amount is treated as a capital gain or loss.
In your letter you indicated that, since the scheme of the Act provides for the flow through of partnership income in a multi-tiered partnership structure, the election under subsection 39(4) should apply to Canadian securities disposed of within that partnership structure.
In our view, an election under subsection 39(4) by a member of a partnership would only apply to Canadian securities disposed of by that partnership. Thus, a subsection 39(4) election made by a member of the Top Partnership, in the scenario described in your letter, would only apply to property owned and disposed of by the Top Partnership. In this respect, we note that subsection 39(4.1) only applies for the purpose of applying subsections 39(4) and (5) and, given that the Top Partnership cannot make a subsection 39(4) election, subsection 39(4.1) would not apply to deem the Top Partnership to have owned and disposed of the Canadian securities owned and disposed of by the Bottom Partnership. Thus, a subsection 39(4) election made by a member of the Top Partnership would not apply to the Canadian securities disposed of by the Bottom Partnership.
We trust our comments will be of some assistance.
Yours truly,
D. Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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