1 May 1990 Internal T.I. 58877 F - Active Business or Specified Investment Business of a Partnership

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.

Dear Sirs:

Re:  Active Business or Specified Investment Business of a Partnership

This is in reply to your letter of October 10, 1989, requesting our views in the following hypothetical situation:

1.     Partnership X is a limited partnership whose only assets are 2 high rise apartment buildings.

2.     The limited partners are substantially all individuals.  The general partner is a corporation which is unrelated to any of the limited partners.

3.     The partnership has 6 full-time employees engaged in the maintenance of the property and on-site property management. In addition, the partnership pays a property management fee to a property management organization at a rate of 6% of rental revenue, which is a reasonable rate in the industry for property management services.

4.     The partnership is profitable. 

It is our understanding that a new corporation will be formed where all or substantially all of the assets of the partnership will be acquired in exchange for shares of this new corporation. It is your view that a share issued in this situation would not have to be held by the recipient or a related person for two years from the date of issue in order to qualify as a qualified small business corporation share for purposes of the capital gains deduction under subsection 110.6(2.1) of the Act.

Our Comments

It is a question of fact whether a rental operation carried on by individuals or by partnerships made up of individuals is a business for the purposes of the Act.  We refer you to Interpretation Bulletin IT-90, paragraphs 2 and 7 for the Department's position on the existence of a partnership versus co-ownership of property.

If a partnership does exist, rather than simply a co-ownership of property, it is our view that the income is income from a business for all the partners involved.  A partnership is the relationship which subsists between persons carrying on a business in common with a view to profit.  With regard to limited partnerships, if the activity of the general partner causes its operations to be regarded as a business, all the limited partners would also be carrying on that activity, - that is the flow through notion subsumed in subsection 96(1) of the Act.

If income from a corporation is from business, it is active business unless it is a specified investment business as described in paragraph 125(7)(e) of the Act.  In the case of corporate partners, if the partnership employs more than 5 full-time employees throughout the year or if the services provided by a corporation associated with it are such that it would reasonably be expected to require more than 5 full-time employees if those services had not been provided, it is the Department's position that none of the corporate partners is carrying on a specified investment business.  In the case of a partner who is an individual, the phrase "specified investment business" is not defined.  In our opinion, if there is any degree of business it will be considered an "active business" pursuant to the definition found in subsection 248(1) of the Act.  Therefore, the level of five full-time employees is not critical in the case of partnerships made up of individuals.

In the case at hand, the shares issued by the new corporation and held by the individual shareholders will be eligible for the enhanced capital gain exemption provided they meet the definition of "qualified small business corporation shares".  One of the conditions is that the shares be held for 24 months preceding the determination time; paragraph 110.6(14)(f) of the Act specifies that the treasury shares are deemed to be owned by a person not related to the particular person, unless specific exceptions are met which would have the effect of waiving the 24 month holding period.  One of these exceptions requires that the shares be issued as part of a transaction where the person disposes of property to the corporation consisting of an interest in a partnership all or substantially all of the assets of which were used in an active business carried on by the members of the partnership.  In our view, this rule which provides an exception to the application of paragraph 110.6(14)(f) of the Act appears to have been met in the hypothetical situation described in your letter.  Accordingly, the share issued in this situation would not have to be held by the recipient or a related person for two years in order to qualify as a small business corporation share.

This opinion is our best interpretation of the law as it applies generally. It may, however, not always be appropriate in the circumstances of a particular case, and as stated in paragraph 24 of Information Circular 70-6R, it is not binding on the Department.

We trust our comments are of assistance.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch