20 July 1989 Internal T.I. 57979 F - Subparagraph 20(1)(e) of the Income Tax 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.

July 20, 1989

Dear Sirs:

Re:  Paragraph 20(1)(e) of the Income Tax Act (the "Act")

This is in reply to your letter of April 25, 1989, wherein you request our response to the following questions:

1)     Does a partnership of individuals earning investment income have the option of claiming a non-calendar year-end?

2)     Can an individual receiving business income from a partnership claim expenditures to which paragraph 20(1)(e) of the Act applies and if so must these expenditures be pro-rated per subparagraph 20(1)(e)(ii) of the Act?

3)     Would a taxpayer who contracted to have a hotel suite managed by a management company on his behalf be considered to be "personally active on a continuous basis"?  What if the taxpayer was involved in decision making related to smoking vs. non-smoking rental, peak period premiums, advertising etc?  If not, what activities would qualify a taxpayer as being "personally active on a continuous basis" for the purposes of paragraph 1100(14.2)(b) of the Regulations.

Our Comments

We offer the following opinions related to the above questions:

1)     A partnership has the option of claiming a non-calendar year-end.  However, where the partnership earns investment income it is a question of fact whether a partnership actually exists.  As stated in paragraph 2 of Interpretation Bulletin IT-90 co-ownership of one or more properties not associated with a business does not of itself create a partnership.  Formal registration of a partnership is not itself decisive as in partnership law it is necessary to review the actual facts of a given situation.  In our opinion, a partnership would exist where a rental business such as the operation of a hotel was carried on by a registered partnership.

2)     Where an individual incurs an expense in the course of borrowing money to b used by him for the purpose of earning income from a business or property and the amount was not otherwise deductible, paragraph 20(1)(e) will apply to the individual.  In addition, as the individual calculates income based upon the calendar year, for purposes of subparagraph 20(1)(e)(iii) of the Act, the number of days in the individual's year will be 365 and thus no pro-rating will occur.

3)     In our opinion, where a taxpayer contracts to have a hotel suite managed by a management company on his behalf, he will not generally be considered to be "personally active on a continuous basis", however, a determination would nave to be made based on the relevant facts of each situation.  In our view, active daily participation would be required, rather than decision making which requires only minor involvement.

We trust our comments will be of assistance to you.

for DirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch