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 an interest in a MURB must be treated as an interest in a partnership.
Position: Not always. It is a question of fact whether the MURB is owned by a partnership or directly.
Reasons: Reading of the law.
April 7, 2006
Thunder Bay Tax Service Office HEADQUARTERS
Christine Stark Allan Nelson
Verification and Enforcement (613) 443-7253
Multi-Unit Residential Building
We are writing in response to your February 6, 2006, electronic mail, which asked for our comments regarding certain income tax aspects of an unnamed deceased taxpayer's investments in multi-unit residential buildings ("MURBs").
The salient facts, as we understand them, are as follows:
- the "Taxpayer" is deceased and her representative has requested a clearance certificate. In reviewing this request, you and a CRA auditor have queried claims for large capital losses and terminal losses in respect of certain MURBs deemed disposed of by the Taxpayer when she died;
- in one MURB apartment complex, the Taxpayer owned an interest in XXXXXXXXXX units out of the total XXXXXXXXXX units. She also had interests in other large MURB apartment complexes (no details were provided to us);
- each of the MURB properties had large outstanding mortgages;
- there is a "Holdco" that is described as owning the land in trust for the unit holders of a particular MURB;
- notes to the financial statements of one MURB indicate that the unit holders are tenants in common. The MURB does not report any financial transactions annually; only the unit holders do;
- the Taxpayer claimed capital cost allowance ("CCA") on her particular MURB properties when she filed her personal tax returns. This was consistent with a sampling of other investors in the properties that you checked;
- the CRA auditor's position is that each year CCA has been taken by each individual unit holder at the maximum rate allowed and recapture should be applicable on the deemed disposition at death. Also, these interests in MURBs are to be treated like any other asset at date of death [i.e., deemed disposition of their interest in the MURB at fair market value];
- the Taxpayer's representative is of the view that the Taxpayer's interest in the MURB is to be treated as a partnership interest. Consequently, the deemed disposition at death would be in respect of a partnership interest and not the MURBs [i.e., the Taxpayer's disposition of a partnership interest would not trigger recapture in respect of the MURBs owned by the partnership]; and
- the representative claims that CRA has taken the general view in the past that an interest in a MURB is an interest in a partnership.
You have asked us whether an interest in a MURB is treated as an interest in a partnership.
There is no requirement that an ownership interest in a MURB be held by a partnership.
As discussed on March 28, 2006 (Stark/Nelson), for tax purposes, MURBs are merely properties that were included in CCA Class 31 or 32. These assets were not subject to the restriction in subsection 1100(11) of the Regulations that would otherwise prevent a taxpayer or partnership from creating or increasing a rental loss by claiming CCA on rental properties (see Archived
IT-367R3 Capital cost allowance - Multiple-unit residential buildings for additional comments).
We have seen many large public offerings of limited partnership interests where the partnerships owned the MURBs. Since MURBs were exempted from the above noted CCA restrictions, they were often marketed as tax shelters.
There were other instances where investors acquired direct and indirect ownership interests in the MURBs. These interests may have been acquired through a co-tenancy or joint venture arrangement, a corporation, a general partnership, or a trust. To illustrate, reference is made to the following jurisprudence where MURBs were not owned by partnerships:
- Baillargeon [92 DTC 1212] - refers to the individual holding shares in undivided co-ownership in a MURB with 143 other investors;
- Ingram [92 DTC 1458] - refers to the Ontario MURBs as being held in joint ventures; and
- Vaillancourt [91 DTC 5408] - refers to the appellant's purchase of a MURB that was held under a declaration of co-ownership registered pursuant to articles 441b et seq. of the Civil Code of Lower Canada.
It is a question of fact as to whether the MURBs are owned by a partnership, by individuals, or otherwise. In making this determination, you may want to ask the Taxpayer's representative to provide evidence to support his view concerning the existence of a partnership or partnerships owning the relevant MURBs. Although not a comprehensive list, consideration could be given to the following:
- does a written partnership agreement exist?
- was there any indication of an intention to form a partnership?
- could the "partners" act as agents of the other "partners" to bind each other when entering into contracts?
- did the investors hold themselves out to the public as being a partnership?
- was there a sharing of net profits from the operations of the MURB?
- did the "partnership" claim CCA on the MURBs?
- in whose name are the mortgages on the MURBs registered?
- who was the registered owner of the MURBs (i.e., a partnership or certain individuals, including the Taxpayer)?
- what did the Taxpayer's purchase documents indicate she was acquiring when she made her initial investment (i.e., an interest in MURBs or a partnership interest)?
- who is noted as being the owner of the MURB on the certificate initially issued by CMHC (as required in order to qualify for inclusion in Class 31 or 32)?
To assist in determining whether a partnership existed, you may also want to refer to paragraph 2 of IT-90 What is a partnership?, which states
Generally speaking, a partnership is the relation that subsists between persons carrying on business in common with a view to profit. However, co-ownership of one or more properties not associated with a business, (which under Common Law might be a joint tenancy or a tenancy in common), does not of itself create a partnership, and this is so regardless of an arrangement to share profits and losses. For guidance on whether a particular arrangement at a particular time constitutes a partnership, reference should be made to the relevant provincial law on the subject, and such law will be viewed as persuasive by the Department of National Revenue. [Underlining is ours]
We also note that if the MURBs are owned by a partnership then CCA cannot be taken at the partner level; it can only be taken at the partnership level (refer to subsection 96(1) of the Act and subsection 1102(1a) of the Regulations1 ). With this in mind, the fact that the Taxpayer claimed CCA in respect of the MURBs seems to be contrary to the representative's argument that the Taxpayer did not own the MURB and that it was owned by a partnership.
If it is determined that the Taxpayer owned an interest in the MURBs and that they were not owned by a partnership or partnerships, then generally we concur with the CRA auditor's views noted above that subsection 70(5) of the Act applies and the Taxpayer could be taxable on recapture of CCA in respect of the MURBs on the deemed disposition at her death.
We hope the above comments are of assistance to you.
If you have additional questions on this matter, please feel free to contact us.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
1 This theme is reiterated in paragraph 2 of IT-128R ["...In this connection it is important to note that in computing the income of a partnership, subsection 96(1) and Regulations 1102(1a) require that partnership property (including depreciable property) be accounted for as if it were owned at the partnership level"], and paragraph 15 of IT-285R2 ["It should be noted that, in calculating the income of a partnership, subsection 96(1) of the Act and subsection 1102(1a) of the Regulations require that partnership property (including depreciable property) be accounted for as if it were owned at the partnership level"].
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2006
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2006