21 June 1990 Internal T.I. 59547 F - Application of GAAR To Enhance Capital Gains Deduction Claims by Partners

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.

June 21, 1990

19(1)

We are writing in reply to your letter of February 1, 1990, wherein you requested our views regarding the possible application of the General Anti-Avoidance Rule (GAAR) in the following hypothetical situation:

1.     Members of a partnership, carrying on a qualifying active business in Canada, wish to take advantage of the enhanced capital gains deduction under subsection 110.6(2.1) of the Income Tax Act.

2.     In order to achieve their objective, the following series of transactions will take place:

(a)     each member of the partnership will roll their undivided interest in each property used in the business into a Canadian-controlled private corporation (CCPC) in return for shares of the CCPC,

(b)     the partnership will be wound-up pursuant to subsection 98(3),

(c)     immediately following the transactions described in (a) and (b), the shares of the CCPC will be sold.

The interaction of section 54.2 and paragraph 110.6(14)(f) would, in your view, permit each partner to claim the enhanced capital gains deduction under subsection 110.6(2.1).  However, you are concerned that this type of transaction may be considered a "misuse or abuse" of the Act and subject to the application of GAAR.

OUR COMMENTS

It would involve finding of fact in a specific situation as to whether or not a transaction, or series of transactions, would be considered to be a misuse or abuse of the Act.  From the limited information set out in your letter, however, it is our view that the situation described therein could very well constitute a misuse or abuse of the Act for purposes of section 245.  This is so especially in view of the circuitous route chosen to accomplish the rollover of a partnership into a corporation.

Although section 54.2 of the Act does not apply generally to partners it does not necessarily mean that shares received by partners in exchange for their partnership interest are automatically on account of income.

What they are is a question of fact to be determined from an examination of all the facts, relevant documents and other information.

Should the situation set out in your letter involve actual taxpayers and proposed transactions you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling.

Should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation to the appropriate District Office for their comments.

We would further caution that the above comments reflect an expression of opinion only, and as such are not binding upon the Department.

Yours truly,

A. Glen Thornley for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch