27 March 1990 Ministerial Letter 59128 F - Capital Gains Exemption - Gains Allocation by 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.

March 27, 1990

Dear Sirs:

Re:  Section 110.6 of the Income Tax Act (the "Act")

We are writing in reply to your letter of November 24, 1989 and our telephone conversation of March 7, 1990, wherein you requested our  comments on whether capital gains allocated to a partner from a partnership are eligible for the capital gains deduction provided for in subsection 110.6(2.1) of the Act.

Our understanding of the facts given to illustrate the issue is as follows:

24(1)

Your Questions

1.     Will the above partnership be considered to be "a trader or dealer in securities" for the purposes of subsection 39(5) of the Act and hence be ineligible for the election in subsection 39(4) of the Act?

2.     Will the capital gains arising from the disposition of "qualifying small business corporation shares" by the partnership allocated to the partners be eligible for the capital gains deduction provided for in subsection 110.6(2.l) of the Act?

Our Comments

While we are unable to confirm, the income tax effects of the particular situation outlined in your letter, we can provide the following general comments related to the application of subsections 39(4), 39(5) and 110.6(2.1) of the Act.

1.     Whether a partnership is a, trader or dealer in securities can only be determined on the particular facts of the situation:  paragraph 5 of IT-479R outlines the Department's interpretation of the term "trader or dealer in securities" for the purposes of subsection 39(5) of the Act.  A partnership which, as a result of special knowledge of a particular corporation not available to the public, utilizes that knowledge to realize a quick gain is considered to be a "trader or dealer in securities" for those particular securities.  In the case where a partnership does not possess such special knowledge, its sole activity is to invest in and hold shares of capital stock of corporations and its members consist entirely of individuals none of whom are 1) traders or dealers (as defined in paragraph 5 of IT-479R) or 2) involved in the management or decision making of the corporations of which it holds shares, it is our opinion such a partnership would generally not be regarded as a trader or dealer referred to in paragraph 39(5) (a) of the Act. Accordingly, such a partnership consisting of individuals resident in Canada would be entitled to make an election pursuant to subsection 39(4) of the Act with respect to their Canadian securities, provided the election is made by a member of the partnership in prescribed form in accordance with the provisions of subsection 96(3) of the Act.

2.     Where a partnership has made an election pursuant to subsection 39(4) of the Act in respect of Canadian securities (as defined in subsection 39(6) of the Act) owned by it, 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, in respect of the capital gains arising as a result of this election from the disposition of qualified small business shares (as defined in subsection 110.6(l) of the Act, allocated to him by the partnership.

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 accordingly, is not binding on Revenue Canada, Taxation.

We trust these comments will be of assistance.

Yours truly,

for Director Business and General DivisionSpecialty Rulings Directorate Legislative and Intergovernmental Affairs Branch