27 June 2006 Internal T.I. 2006-0167421I7 - Private Foundation Investing in Ltd 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: Whether a private foundation would be considered to carry on a business by virtue of its foreign limited partnership interest such that the private foundation's registration could be revoked pursuant to paragraph 149.1(4)(a).

Position: Yes, if it were established that the foreign limited partnership was a partnership for Canadian tax purposes.

Reasons: Question of law.

June 27, 2006

	HEADQUARTERS				HEADQUARTERS
	Charities Directorate			Income Tax Rulings
			  				Directorate
	Attention:  Daniel Racine 		Guy Goulet CA, M.Fisc.

							2006-016742	

Private Foundation Investing in Foreign Limited Partnerships

This is in reply to your fax of January 17, 2006, wherein you requested our comments with respect to a situation where a private foundation (Foundation) located in the province of Quebec is a limited partner of foreign limited partnerships (FLP) formed in other jurisdictions. The FLPs are actively engaged in investment activities that would constitute a business. You requested our views as to whether the Foundation would be considered to carry on a business by virtue of its interests in the FLPs such that the Foundation's registration could be revoked pursuant to paragraph 149.1(4)(a) of the Income Tax Act (Act). We understand that each FLP is considered a "partnership" under the laws of its respective jurisdiction and consequently not subject to any income tax.

The Act does not define a "partnership", but outlines the tax consequences if one exists. It is a question of fact and law as to whether a partnership exists. The CRA indicated in Interpretation Bulletin IT-90 that relevant provincial law will be viewed as persuasive in determining whether a particular arrangement at a particular time constitutes a partnership. The Supreme Court of Canada has recently confirmed this position in Backman v The Queen, 2001 DTC 5149. Justices Iacobucci and Bastarache indicated on behalf of the majority: (paragraph 17)

The term "partnership" is not defined in the Act. Partnership is a legal term derived from common law and equity as codified in various provincial and territorial partnership statutes. As a matter of statutory interpretation, it is presumed that Parliament intended that the term be given its legal meaning for the purposes of the Act: N. C. Tobias, Taxation of Corporations, Partnerships and Trusts (1999), at p. 21. We are of the view that, where a taxpayer seeks to deduct Canadian partnership losses through s. 96 of the Act, the taxpayer must satisfy the definition of partnership that exists under the relevant provincial or territorial law. This is consistent with Interpretation Bulletin IT-90, "What is a Partnership?" dated February 9, 1973. It is also consistent with the approach taken to the interpretation of the Act by a majority of this Court in Will-Kare Paving & Contracting Ltd. v. Canada, [2000] 1 S.C.R. 915, [2000] SCC 36, at para. 31. It follows that even in respect of foreign partnerships, for the purposes of s. 96 of the Act, the essential elements of a partnership that exist under Canadian law must be present: for a similar approach, see Economics Laboratory (Canada) Ltd. v. M.N.R., 70 DTC 1208 (T.A.B.).

In Stanley Witkin v The Queen, 2002 DTC 7044, the Federal Court of Appeal concurred with that interpretation and concluded: (paragraph 7)

The decision of Beaubier T.C.C.J. was released on May 19 th, 1998, prior to the decisions of the Supreme Court of Canada in Continental Bank Leasing Corp. v.Canada, [1998] 2 S.C.R. 298, Spire Freezers Ltd. v.Canada, [2001] 1 S.C.R. 391 and Backman v. Canada, [2001] 1 S.C.R. 367. As a result of this recent jurisprudence, it is now well established that the threshold question in cases such as this is whether the appellant was a partner in a partnership according to the definition of partnership that exists under the relevant provincial law, even in respect of foreign partnerships (see Backman, supra paragraph 17).

In the present situation, the relevant provincial law is the Civil Code of Quebec (CCQ) because the Foundation is located in the Province of Quebec. Under the CCQ, a partnership is a nominate contract for which the legal rules are set out in Article 2186 and in those articles subsequent. Article 2186 of CCQ indicated that "A contract of partnership is a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits."

We do not have all the relevant facts and documentation that would permit us to conclude whether or not the FLPs are partnerships for Canadian tax purposes. However, we understand from the financial statements of each FLP that the members of each FLP would be carrying on an investment business in common with a view to share the profits. This fact more closely resembles that of a Quebec partnership under the CCQ and, as such, the FLPs would probably be considered, after a more detailed analysis, to be a partnership for Canadian income tax purposes.

If it were established that the FLPs were partnerships for Canadian tax purposes, it is our view that the Foundation as a limited partner would be carrying on a business through the FLP such that its registration would be subject to revocation pursuant to paragraph 149.1(4)(a).

This position is supported by the Tax Court of Canada decision in Fredette v. The Queen, 2001 D.T.C. 621, where Justice Archambault held (footnote 16, paragraph 50):

It must be borne in mind that a partnership is not considered as having separate legal personality either in common law or in civil law. (See, regarding the situation in civil law, the decision by the Quebec Court of Appeal in Ville de Québec c. La Cie d'immeubles Allard Ltée, [1996] R.J.Q. 1566). It is obvious to me that this is what Parliament assumed when it passed subsection 96(1) of the Act, which provides that the income of a partnership must be computed as if the partnership "were a separate person" and each partnership activity (including the ownership of property) were carried on by the partnership "as a separate person". This subsection also provides that the amount of the income of the partnership from any source constitutes the income of the partner from that source to the extent of his share thereof.

(...)

It must therefore be concluded that the partner derives his income from the activities of the partnership itself, not from property (the interest in the partnership) and that the interest expenses incurred by that partner to finance his contribution were incurred to obtain that business income (or income from property held by the partnership).

Our position is also supported by the Federal Court of Appeal decision in the Robinson case (Trustee of Robinson v. The Queen, 1998 DTC 6065), wherein the Court concluded that even though the limited partner took no part in the management of the business, "does not ... mean that it and the other limited partners did not carry on that business in conjunction with the general partners in that year." The Court also referred to another decision, Gordon Grocott v The Queen, 1996 DTC 1025, which stated that:

A limited partner is nonetheless a partner in a partnership. It is simply that his liability is limited by statute provided that he does not participate in running the business. I do not think it can be said that this limitation of liability and prohibition against any active part in the control of the business means that he is not carrying on business through the partnership.

We trust that these comments will be of assistance. Please do not hesitate to contact us if you have further questions.

Ghislain Martineau
Manager
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch