22 January 1990 Ruling 58451 F - Active Business Income

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.

January 22, 1990

Dear Sirs:

Re:  Active Business Income

We are writing in reply to your letter of July 26, 1989, wherein you requested our interpretation concerning the "flow through " of active business income to a limited partner for the purposes of sections 125 and 95 of the Income Tax Act (the "Act").  We regret the delay in replying to your letter.

Your questions are as follows:

1.     Corporation A is a limited partner in a limited partnership ("LP"), which is carrying on an active business.  Does Corporation A's share of the income allocated to it from the LP, represent active business income to it?  While paragraph 4 of Interpretation Bulletin IT-73R3 stated that "a share of income from an active business of a partnership is considered to be income of a corporate partner (whether a general or limited partner) from the active business and thereby qualifies for inclusion in the calculation described in paragraph 125(1)(a), IT-73R4 does not contain this statement.  Consequently, does the nature of the income derived by a partnership flow through to all partners, or must each partner be tested on the basis of that partner's participation in the activities of the partnership?

2.     If the level of participation of each partner is to be taken into account in determining whether the income allocated from the partnership to the partner is active business income to that partner, does the legal restriction on the activities of a limited partner preclude that partner from having active business income from the limited partnership?

3.     Do the responses to the above questions apply for the purposes of both sections 125 and 95 of the Act?

Our Comments

A.  Section 125-Small Business Deduction ("SBD")

1.     Prior to amendments to the Act effective in 1979, the term active business was not defined, and the Department's position that you refer to in IT-73R3 reflected the outcome of various court cases dealing with that subject.  However, effective for taxation years commencing after 1978, the following definitions were added to the Act: 1) "active business" paragraph 125(6)(d) of the Act, 2) "income of the corporation for the year from an active business" paragraph 125(6)(e) of the Act, and 3) "active business" subsection 248(1) of the Act.  These definitions provided criteria to be used in determining the types of income that should be included or excluded from the concept of active income.  In addition, various definitions were added to section 125 of the Act to include in the calculation of income eligible for the SBD a corporate partner's share of income or loss from a partnership.  Subsequently, substantial revisions were made to section 125, applicable to 1985 and subsequent taxation years, including replacing the previous definitions with those now found in paragraphs 125(7)(a) to (g) of the Act, and "active business" in subsection 248(l) of the Act.

     Consequently, IT-73R4, which applies to 1985 and subsequent taxation years, indicates in the first sentence of paragraph 3 that the reader must refer to paragraph 23 of that bulletin in order to determine the active business income of a corporation that is a member of a partnership.  Paragraphs 23 and 24 discuss the concept of "specified partnership income", as defined in paragraph 125(7)(f) of the Act, included in the calculation of income eligible for the SBD in subparagraph 125(1)(a)(ii) of the Act, as well as "specified partnership loss", as defined in paragraph 125(7)(g) of the Act, included in the SBD calculation in subparagraph 125(1)(a)(iv) of the Act.  The definition of "active business" in subsection 248(1) of the Act is applicable in determining the meaning of those words as they appear in the phrase "from an active business carried on in Canada by it as a member of the partnership" in paragraphs 125(7)(f) and (g) of the Act.

     The income or loss of a partnership from a particular source is included in the income of each partner to the extent of its share of such income or loss in accordance with subsection 96(1) of the Act.  It is our opinion that all members of a partnership, whether general or limited, are considered to be carrying on the business of the partnership.  Therefore, the part of the sentence in paragraph 4 of IT-73R3 that stated "A share of income from an active business of a partnership is considered to be income of a corporate partner (whether a general or a limited partner) from an active business" is still applicable.  Consequently, where a limited partnership is carrying on an active business, all members of that partnership will have income derived from an active business.  However, in order to determine the amount of such income that is eligible for the SBD, the amount of specified partnership income or loss must be calculated in accordance with paragraphs 125(7)(f) and (g) of the Act, subject to the restrictions of subsection 125(6), (6.1), (6.2), and (6.3) of the Act.

2.     As indicated in 1 above, for the purpose of section 125 of the Act, the level of participation of each partner is not taken into account in determining whether the income from a partnership, allocated to the limited partners, is active business income to the partners.

B.  Section 95-Foreign Affiliates

1.     For the purpose of section 95 of the Act, all members of a partnership are considered to be carrying on the business of the partnership.  Consequently, where a limited partnership is carrying on an active business, all members of that partnership will have income derived from an active business.  The concept of active business used in section 95 as it relates to the calculation of foreign accrual property income under paragraph 95(1)(b) of the Act for the purpose of section 91 of the Act is not defined.  To the extent they relate to the computation of active business income, the definitions appearing in subsection 125(7) of the Act referred to above, are only applicable to businesses carried on by a taxpayer resident in Canada.  When interpreting the words "active business", the comments in IT-73R3, including paragraph 4, will generally be relevant with respect to the meaning of income from an active business within the context of paragraph 95(1)(b) of the Act.  The concept of active business is modified in subsection 95(2) of the Act to include income that pertains to and is incident to an active business that would otherwise not qualify and to exclude certain types of service income that might ordinarily qualify as active business income.

2.     As indicated in 1 above, for the purpose of section 95 of the Act, the level of participation of each partner is not taken into account in determining whether the income from a partnership, allocated to its limited partners, is active business income to those partners.

We trust these comments will be of assistance.  These comments represent our opinion of the law as it applies generally.  As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and is not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch