10 November 1989 Ministerial Letter 57948A F - Section 54.2 and Subsection 110.6(2.1) 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.

November 10, 1989

19(1)

We are replying to your letter of April 19, 1989, wherein you requested our views regarding the application of section 54.2 and subsection 110.6(2.1) of the Income Tax Act (the "Act") in the following hypothetical situation.

1.     LP is a limited partnership that is registered as such under the laws of the relevant provincial jurisdiction.

2.     LP is a "Canadian partnership" (within the meaning assigned by paragraph 102(a) of the Act).

3.     All or substantially all of the assets of LP are used in an "active business" (with the meaning assigned by subsection 248(1) of the Act) carried on primarily in Canada.

4.     LP subsequently transfers all of its assets to a corporation incorporated in Canada, utilizing the provisions contained in subsection 85(2) of the Act to effect the transfer on a tax deferred basis.

5.     Within days of the above-noted transfer, LP sells its shares of the corporation to an arm's length purchaser.  The sale occurs after June 17, 1987.  It is conceded that the assets were transferred in contemplation of the sale of shares.

6.     The corporation at all relevant times is a "small business corporation" (with the meaning assigned by subsection 248(1) of the act).

Our Comments

We will respond to your questions in the order in which they appear in your letter.

1.     (a)  It is our opinion that section 54.2 of the Act does not deem the shares to be capital property of the LP because the LP is not a person under the Act.

     Paragraph 1 of IT-90 states, in part, that "a partnership is not a person nor is it deemed to be within the meaning of the Act, notwithstanding that section 96 provides that the income of a member of a partnership is computed as if the partnership were a separate person resident in Canada."

     (b)  The issue of whether a particular transaction is on income or capital account will depend on all the circumstances of each case.  It is our view that without section 54.2 of the act, the sale of assets to a corporation by a person followed shortly thereafter by a sale of the shares by that person could very well be an "adventure in the nature of trade." The profit derived therefrom, could be taxed as ordinary income of that person.

     (c)  Since a partnership is by definition "... the relation that subsists between persons carrying on business in common with a view to profit" (paragraph 2 of IT-90) it is our view that the sale of assets to a corporation by the LP followed shortly thereafter by a sale of the capital shares by the LP could also be an adventure in the nature of trade.  The income derived by the LP from the disposition of shares could be business income of the LP and allocated to the individual partners under paragraph 96(1)(f) of the Act.

2.     In the event that the transaction by the LP described in 1(b) resulted in a taxable capital gain on the disposition of qualified small business corporation shares (as defined in subsection 110.6(1) of the Act) it is our opinion that each individual partner would be eligible to claim the enhanced capital gains deduction under subsection 110.6(2.1) of the Act subject to the provisions of subsection 110.6(11) of the Act.

We hope these comments prove helpful.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch