18 December 2002 External T.I. 2002-0153245 - APPLICATION OF THE ACT

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: The application of subsection 127(24) of the Income Tax Act to a series of hypothetical transactions between a partnership and its members.

Position: No position given.

Reasons: Question of fact.

XXXXXXXXXX 2002-015324
J. Gibbons, CGA
December 18, 2002

Dear XXXXXXXXXX:

We are replying to your letter dated July 19, 2002, concerning the application of subsection 127(24) of the Income Tax Act (the "Act") to a series of hypothetical transactions between a partnership and its members. In particular, you requested our comments whether the partnership and its members would be considered to be dealing at arm's length, whether certain payments made by the partnership would qualify as scientific research and experimental development (SR&ED) expenditures allocable to its members, and whether section 245 of the Act would apply to the transactions.

We refer you to Information Circular 70-6R5, wherein it states that it is our policy not to provide written confirmation of the tax implications inherent in a transaction or a series of transactions unless an advance ruling request is submitted in the manner set out in that Circular. Nonetheless, we are prepared to provide the following general comments.

Our Comments

Whether partners are dealing at arm's length is a question of fact which can only be determined after reviewing all of the surrounding facts and circumstances. As indicated in paragraph 20 of IT-419R, "Meaning of Arm's Length", where a partner is not in a position to control a partnership in which the partner has an interest, and that partner has little or no say in directing the operations of the partnership, it is generally recognized that the partner is dealing at arm's length with the partnership.

An amount paid by a taxpayer to an approved association that undertakes SR&ED or an approved university, college, research institute or other similar institution will generally be a qualified expenditure as defined in subparagraph (a)(ii) of the definition of this term in subsection 127(9) if the payment is to be used for SR&ED carried on in Canada that is related to a business of the taxpayer and the taxpayer is entitled to exploit the results of that SR&ED. In the case of payments made by a partnership, the members of the partnership will generally be entitled to claim a portion of the ITC pursuant to subsection 127(8), subject to the restriction in subsection 127(8.1) for limited partners.

We are not prepared to comment on the application of the general anti-avoidance rule in the context of a technical interpretation. We will confirm the application of the general anti-avoidance rule only in response to a request for an advance tax ruling and provided there has been full disclosure all of the relevant facts. Also, in the situation described in your letter, the application of subsection 103(1) would have to be considered.

We trust that these comments will be of assistance.

Yours truly,

Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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