4 August 1994 External T.I. 9326065 - NON-QULAIFYING REAL PROPERTY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. When an individual is a member of a partnership that is a member of a second partnership, whether the sale of real property by the second partnership or the sale of a partnership interest the fair market value of which is derived principally from real property would be considered to be "non-qualifying real property" of the individual.

Position TAKEN:

Yes, unless one of the exceptions concerning ownership and use of the property applies as stated in subparagraph a(iii) in the case of a sale of real property or in paragraph (c) in the case of a sale of a partnership interest of the definition of "non-qualifying real property" in subsection 110.6(1) of the Act.

Reasons FOR POSITION TAKEN:

Real property is included by virtue of paragraph (a), and a partnership interest, the fair market value of which is derived principally from real property is included in paragraph (c) of the definition of "non-qualifying real property"

		932606
XXXXXXXXXX	B. Kerr

Attention: XXXXXXXXXX

August 4, 1994

Re: Non-Qualifying Real Property

This is in response to your letter of September 8, 1993, wherein you requested a technical interpretation concerning the definition of the term "non-qualifying real property" within the meaning of subsection 110.6(1) of the Income Tax Act. We apologize for the delay in responding.

Unless otherwise stated all references to statute are references to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act").

In your letter you identified a situation where individual investors would become limited partners in a limited partnership ("LP1"). LP1 would then invest its funds by acquiring an interest in a second limited partnership ("LP2"). LP2 will employ more than five full-time employees and will use its funds to acquire land, buildings and equipment to be used in an active business. In the event that LP2 sells any of its capital property or its business, or LP1 sells its interest in LP2, or an individual investor sells their interest in LP1 a capital gain may result. In this regard you have requested our comments on whether for the purpose of section 110.6 the particular property disposed of would be considered to be "non-qualifying real property".

Our Comments

The situation described in your letter appears to involve actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. However, we can offer the following general comments.

The meaning of the term "non-qualifying real property" of an individual as defined in subsection 110.6(1) of the Act includes:

"...property disposed of after February 1992 by the individual, or a partnership any income of which is required to be included in computing the income of the individual, that at the time of its disposition...is

(a) real property...

(c) an interest in a partnership...the fair market value of which is derived principally from real property..."

In our view, each of the alternate methods of dispositions you describe would fall within this wording. Where a partnership sells real property paragraph (a) applies. Where an individual or a partnership sells an interest in a partnership, the fair market value of which is derived principally from real property, paragraph (c) applies. When a partnership disposes of property, by virtue of the provisions of paragraph 12(1)(l), subsection 96(1) and paragraph 100(2)(b), the income of the partnership will eventually be included in the hands of the individual investor so that the preamble of the definition is satisfied.

However, there are exceptions in certain situations depending on the ownership and use of the property. In the case of real property disposed of by a partnership the exception is found in subparagraph (a)(iii), which generally provides for an exception if the property was used for the time period referred to in clause (A) or (B) thereof principally in an active business carried on by a person referred in clause (C) to (G) thereof. The exception, however, does not apply where the individual is a specified member of the partnership. A "specified member" as defined in subsection 248(1) of the Act includes a limited partner.

Where the property is an interest in a partnership, the fair market value of which is derived principally from real property, the exception is found in paragraph (c) which provides an exception if the real property was used for the time period referred to in subparagraph (i) or (ii) thereof principally in an active business carried on by one or more persons as members of the partnership or by persons described in any of clauses (a)(ii)(C) to (H). In order to determine whether this exception applies the identity of and relationship between all members of a particular partnership would be required.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch