1993 Administrative Letter 9335986 F - Partnership - Specified Member

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.

February 14, 1994

Attention:  Mara Praulins

Specified Member of a Partnership

This is in reply to your memorandum dated December 8, 1993, in which you asked our opinion whether XXXXXXXXXX

The definition of the expression "specified member" in subsection 248(1) of the Income Tax Act (the "Act") provides, among other things, that any member of a partnership will be a "specified member" in a fiscal period or taxation year of the partnership, as the case may be, unless the member

(i)      is actively engaged in those activities of the partnership business which are other than the financing of the partnership business, or

(ii)      is carrying on similar business as that carried on by the partnership in its taxation year, otherwise than as a member of a partnership,

on a regular, continuous and substantial basis throughout that part of the period or year during which the business of the partnership is ordinarily carried on and during which the member is a member of the partnership.

As stated in paragraph 2 of Interpretation Bulletin IT-90, a partnership is the relation that subsists between persons carrying on business in common with a view to profit. That statement is in conformity with the Common Law definition of a partnership (e.g. section 2 of the Ontario's Partnership Act). Thus, it is our view that the member of a partnership may be viewed as carrying on the business of the partnership. In our opinion, this is implicit in the condition (ii) mentioned above.

However, to be excluded from the definition of "specified member", a member should be actively engaged in the activities of the partnership or should carry on, otherwise than as a member of a partnership, a similar business as that carried on by the partnership. Furthermore, as mentioned above, these activities have to be carried on by the member on a regular, continuous and substantial basis throughout the given fiscal period or taxation year.

The determination of the nature (active vs passive, regular and continuous vs sporadic and substantial vs nominal) of the involvement of XXXXXXXXXX is a question of fact that can only be answered after the examination of the relevant facts. On the sole basis of the facts stated in XXXXXXXXXX letter which was attached to your memorandum, our initial impression is that Holding is not actively engaged on a regular, continuous and substantial basis in XXXXXXXXXX activities. You will therefore appreciate that we are unable to make a final determination in that respect.

Our Directorate answered a round table question for the 1992 annual conference of the Association de planification fiscale et financière which dealt with the determination of when a partner is "actively engaged in the activities of the partnership's business on a regular, continuous and substantial basis". For your information, the following is a translation of the question, our answer and the Department of Finance's comments:

"Question 47 - Scientific research and experimental development

A partnership is created to market research results in the area of computer technology, in particular in the area of expert systems. Those in charge of scientific research and experimental development projects (R&D) are developing, among other things, various programs involving member participation. These participation activities consist of answering questionnaires aimed at better defining user interfaces and validating the R&D work.

Instead of surveying and sampling the population in general, it is the members (who do not necessarily have experience in the area of R&D or computer technology) who respond to these surveys. Moreover, the members meet from time to time with project representatives so that the latter can bring them up to date on the progress of the work and to approve decisions and budgets. While the R&D work was being carried out, regular reports were issued to the partners.

Does the Department of National Revenue think that the partners' activities were sufficiently developed for them not to be considered as specified members? Can the Department of National Revenue or the Department of Finance provide a definition of "actively engaged in the activities of the partnership business on a regular, continuous and substantial basis" by indicating the factors that should be evaluated (hours per year, number of meetings and so on)?

Department of National Revenue response

In order to determine whether the activities of members are sufficiently developed for them not to be considered as "specified members", the particular facts of a situation must be reviewed as a whole. In addition, the Department has not prepared exhaustive guidelines regarding the expression "actively engaged in the activities of the partnership business on a regular, continuous and substantial basis" for defining "specified member" in subsection 248(1) of the Act, since each case must be analyzed on its own facts.

However, the Department considers that a person is actively engaged in a business when that person is directly involved in the management and/or the daily activities of the business. As a general rule, the person devotes time, work and energy to the business. The quantity and quality of his efforts must also be taken into consideration in determining his share in the income of the business. Moreover, the participation of the member must be regular, continuous and substantial. This criteria would not be met, for example, if the member's activities and efforts were infrequent or were provided at irregular intervals.

While respecting the requirement of regular, continuous and substantial participation, the Department considers that the more a member is involved in the management and/or the current activities of the business, the less likely it is that the member would be considered a "specified member" in terms of subsection 248(1) of the Act. Based on the facts described above, it seems to us that the members' activities do not meet the criteria mentioned earlier and accordingly they would be considered "specified members".

Department of Finance response

XXXXXXXXXX

On another occasion, this Directorate elaborated the following other criteria regarding the determination as to whether a member is actively engaged:

1)     Does the partner carry out the activities of the partnership's business (such as research) or are the activities carried out by another partner, employees or by third parties?

2)     Where the partnership engages others to carry out activities of the partnership (such as research), are the activities which relate to management, decision making, direction, promotion, etc., performed by the partner himself? Is the partner directly involved in the supervision of employees or contractors or is such supervision performed by another partner or a third party?

3)     Who makes the decisions related to the daily operation (other than financing) of the partnership? Is it the partner himself, other partners, or a third party?

In your memorandum you mentioned that if XXXXXXXXXX and the other partner (XXXXXXXXXX) are considered to be specified members there would be no active partners and the ITC on the eligible SR&ED will not be available to either partner. It is our opinion that if all the partners of XXXXXXXXXX are specified members, nobody will be eligible to claim ITC on the "qualified expenditures" incurred by the partnership. This conclusion seems inevitable under the clear wording of subsection 127(8) of the Act.

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