6 November 1990 Ruling 901091 F - Deemed Majority Interest Partner

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.

19(1)

November 6, 1990

Dear Sirs:

Re:  Subsection 97(3.1) of the Income Tax Act (the "Act")

We are writing in reply to your letter of June, 6, 1990, wherein you requested our opinion regarding the application of subsection 97(3.1) of the Act to the hypothetical situation described below. We apologize for the delay in responding to your letter.

Facts

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

1.     A corporation is controlled by three brothers, each of whom own 1/3 of all of the issued and outstanding shares of the corporation. The brothers hold these shares immediately before and after the transaction described in 3 below.

2.     A partnership is established with the same, three brothers being the only partners. The brothers are to share equally in any loss or income allocated to them for income tax purposes by the partnership.

3.     The corporation sells capital property to the partnership and receives from the partnership consideration equal to the fair market value of the property at the time of the transfer. As that value is below the property's adjusted cost base, the corporation would have realized a capital loss on the sale of the asset to the partnership had it not been for the application of paragraph 97(3)(a) of the Act.

Your Opinion

It is your opinion that subsection 97(3.1) of the Act will deem the corporation to meet the definition of deemed majority interest partner. The reasons for your opinion are as follows:

1)     the partners of the partnership constitute a group of persons who control the corporation immediately before and after the disposition of property to the partnership, and

2)     those partners are entitled, immediately after the transfer, to an amount in excess of one-half of the income of the partnership.

Your Question

Will the corporation selling the property to the partnership be considered a deemed majority interest partner pursuant to subsection 97(3.1) of the Act?

Our Comment

We agree with your opinion that the corporation in your example would be deemed to be a majority interest partner pursuant to subsection 97(3.1) of the Act.

We trust this comment will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch