4 February 1994 External T.I. 9325245 F - Small Business Corp

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Advance Ruling Request for XXXXXXXXXX

We are writing in response to your letter dated August 16, 1993 in which you requested an advance income tax ruling on behalf of XXXXXXXXXX As discussed with you by telephone (Watson/XXXXXXXXXX) on December 16, 1993, we are unable to provide advance income tax rulings on the proposed transactions described in your letter. However, we offer our opinions on some of the issues of concern to you. Those issues and our opinions are as follows:

1.     Are assets used principally in the active business of a limited partnership used in the active business of the corporate general partner of the limited partnership for the purposes of determining whether the corporate general partner meets the definition of small business corporation in subsection 248(1) of the Income Tax Act (the "Act")?

The Department has made several public statements on this subject.

As stated in paragraph 6 of IT-486R:

"6. Where a corporation has a partnership interest as one of its assets, it is the underlying partnership assets (to the extent of the corporation's interest therein) that are used in determining whether all or substantially all of the corporation's assets are used in an active business. Provided that these assets are used in an active business carried on primarily in Canada by the partnership, they will qualify."

In addition, in response to a similar question at the Thirty-Third Tax Conference of the Canadian Tax Foundation (question 31) we stated: "...an interest in a partnership held by a corporate partner may qualify as an asset used in an active business so that it is possible for the corporate partner to qualify as a small business corporation...our answer does not depend on whether the corporate partner is a limited or a general partner." Although this question dealt with the definition of a small business corporation within the meaning of paragraph 70(11)(c) of the Act, the same interpretation is applicable to the definition of a small business corporation as defined in subsection 248(1) of the Act.

2.     How is the five full time employees test in subparagraph 125(7)(e)(i) of the Act applied to a corporate general partner of a limited partnership?

For purposes of subparagraph 125(7)(e)(i) of the Act, with respect to the partner's income from the particular partnership only, each full-time employee of the particular partnership will be considered to be a full time employee of each corporate partner.

This position was stated in response to question 51 of the Round Table at the Fortieth Tax Conference of the Canadian Tax Foundation. See also paragraphs 14 and 15 of IT-73R4.

3.     Is the fair market value of the partnership interest relevant when determining the fair market value of the assets of the corporate general partner?

In applying the look through approach to a partnership interest it is the fair market value of the proportionate interest in the assets of the partnership which is considered to be the fair market value of the assets of the corporate partner. The fair market value of the partnership interest is not added to the fair market value of the assets of the corporate partner when evaluating whether or not substantially all of the assets of the corporate partner are used in an active business.

4.     Is an advance from a corporate partner to a partnership, which uses the funds in an active business, an asset used in an active business of the corporate partner?

An advance to a partnership does not form part of the partner's capital investment in the partnership. The advance would have preference over any capital investment in the partnership and would earn interest income for that partner. In our view, a partner's advance to the partnership is generally not an asset used in an active business unless that partner is in the business of advancing funds.

5.     Does a temporary accumulation of cash, not used in an active business, cause the corporate partner not to be a small business corporation?

If there is a permanent accumulation of cash not used in the business, that cash is clearly not an asset used in an active business. In the proposed transaction described in your letter, there is no obvious reason why cash should be retained by the partnership or by the corporate general partner. If the purpose of the refinancing is to generate cash for the shareholders of the corporate partners, there is no reason to delay moving the cash to the intended recipients. In the final analysis, it is a question of fact. As each situation must be judged on its own facts we have not developed general guidelines in this area.

We hope these comments will be of assistance to you. XXXXXXXXXX deposit will be returned shortly in a separate letter.

Yours truly,

for DirectorManufacturing Industries, Partnerships and Trusts Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch