21 February 2006 External T.I. 2005-0120751E5 - Specified Investment Business & Partnerships

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.

Principal Issues: Would the exclusion in paragraph 125(7)(b) at the definition of specified investment business be met where the relevant associated corporation was a corporate partner and the partnership provided services to the particular corporation?

Position: Question of fact. Based on the limited hypothetical set of facts provided it appears that the exclusion in paragraph (b) would be met.

Reasons: Consistent with jurisprudence and our reading of the law.

							2005-012075
XXXXXXXXXX 						Allan Nelson, C.M.A
(613) 443-7253
February 21, 2006

Dear XXXXXXXXXX:

Re: Definition of "specified investment business" - Technical Opinion Request

This is in response to your February 28, 2005, letter and our telephone conversations on September 9, 2005 and January 18, 2006 (XXXXXXXXXX/Nelson), where you asked for our opinion concerning the definition of specified investment business in subsection 125(7) of the Income Tax Act (the "Act").

Hypothetical Scenario

• Aco is a Canadian controlled private corporation, within the meaning of that term in subsection 125(7) of the Act. Aco is associated with Bco;
• Aco has less than 5 full-time employees and its only activity is carrying on a business, the principal purpose of which is to derive income from property [the exceptions in the preamble of the definition of specified investment business in subsection 125(7) of the Act do not apply];
• a particular Canadian partnership's only activity is carrying on an active business in Canada;
• the partnership has two partners; "Bco" and "Cco", both which are Canadian controlled private corporations. Bco is the general partner and Cco is the limited partner of the partnership;
• none of the employees are shareholders in any of Aco, Bco or Cco; and
• in the course of carrying on its active business, the partnership provides administrative services to Aco to such an extent that if they had not been provided, Aco could reasonably be expected to require more than 5 full-time employees.

Question

You asked for our views concerning whether Aco would be carrying on a specified investment business in the above hypothetical example.

The Legislation

The definition of specified investment business in subsection 125(7) of the Act states, in part,

"specified investment business"...does not include a business carried on by the corporation [Aco, in this case] in the year where...

(b) any other corporation [Bco, in this case] associated with the corporation provides, in the course of carrying on an active business,...administrative...services to the corporation in the year and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided"

Our Comments

As explained in Information Circular 70-6R5, dated May 17, 2002, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of some assistance to you.

Generally, it is our view that the members of a partnership (i.e., Bco and Cco in this case) would carry on the business of the partnership. This position is consistent with the Federal Court of Appeal decision in Mary Robinson and Evelyn Gertrude Robinson, The Trustees of the Percival Samuel Robinson Trust [98 DTC 69065], where at paragraph 16 of the decision, it is stated

"...These provisions, in my view, appear clearly to contemplate that all of the partners of a limited partnership carry on the business of the partnership...It is, therefore, the persons which compose the partnership that carry on the business rather than the limited partnership itself..."

In your hypothetical scenario this means that Bco is providing, in the course of carrying on the partnership's active business, the administrative services to Aco that are contemplated in paragraph (b) of the specified investment business definition.

Since Aco would reasonably be expected to require more than 5 full-time employees if those services had not been provided, we concur with your view that the exception in paragraph (b) of the specified investment business definition will be met. Consequently, Aco would not be carrying on a specified investment business.

Our comments are based on the limited facts presented in this hypothetical scenario. Since these determinations always involve question of fact and law, we might have a different view once all the relevant facts in any given scenario were available.

In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the Canada Revenue Agency.

We hope the above will be of assistance to you.

Yours truly,

S. Chua, LLB(Hons), FCA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch