13 February 2003 External T.I. 2002-0167445 - EXCLUDED 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Application of grandfathering rules to subsection 40(3.15); Can an interest in a partnership be an excluded interest if property is not owned by the partnership on February 22, 1994 but is acquired in circumstances described in subsection 40(3.16)(a), (b) or (c)?

Position: Yes

Reasons: Subsection 40(3.17) allows for this result

XXXXXXXXXX 2002-016744

Lena Holloway, C.A.

February 13, 2003

Dear Sir or Madam:

Re: Subsection 40(3.15) - Excluded Interest

We are writing in reply to your letter of October 2, 2002, concerning the meaning of the phrase "throughout that period" as used in subsection 40(3.15) of the Income Tax Act (the "Act").

Subsection 40(3.1) of the Act provides that a limited partner or a specified member of a partnership is deemed to have realized a gain when the adjusted cost base of that member's partnership interest is negative at year end. Subsection 40(3.1) does not apply to a member of a partnership if that member's interest is an "excluded interest" as described in subsection 40(3.15) at the end of the fiscal period of the partnership. A partnership interest will qualify as an excluded interest at any time if the partnership actively carries on a business that was carried on throughout the period beginning on February 22, 1994 and ending at that time or if it earns income from a property that was owned by it throughout that period. Where, however, there has been a substantial contribution of capital or a substantial increase in the indebtedness of the partnership, such a partnership interest will not be considered an excluded interest. Generally, paragraphs (3.16)(a), (b) and (c) provide that an amount will not be considered substantial where the amount was raised under an agreement or offering document entered into or filed before February 22, 1994, and completed before 1995, or March 2, 1995 in the case of a certified film production.

Subsection 40(3.17) further provides that, for the purpose of subsection (3.15), a partnership to which paragraph (3.16)(a), (b) or (c) applies shall be considered to have actively carried on the business or earned income from the property contemplated by the documents referred to in those paragraphs, continuously from February 22, 1994 until the earlier of the closing date, if any, stipulated in the document and January 1, 1995 (the "grandfathered period").

You noted in your letter that while subsection 40(3.17) deems a partnership to have earned income from the property throughout the grandfathered period, it does not deem the partnership to have owned the property. You further noted that the wording of subsection 40(3.15) requires the partnership to earn "income from a property that was owned by it throughout that period". These wording differences in subsections 40(3.15) and (3.17) have resulted in your questioning whether subsection 40(3.15) requires earning income throughout the period and not necessarily ownership throughout the period.

In our view, the intent of subsection 40(3.17) is to ensure that a partnership that raises an amount in circumstances to which paragraph 40(3.16)(a), (b) or (c) applies meets either the "active business" or "income from property" requirement set out in subsection 40(3.15) throughout the grandfathered period. Accordingly, we will consider a partnership that has raised an amount in circumstances to which paragraph 40(3.16)(a), (b) or (c) applies to have fulfilled these requirements.

We trust the above comments are of assistance.

Yours truly,

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

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