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.Whether real property owned by a partnership or a joint venture, the members of which are unrelated individuals, and used in an active business by another partnership, the members of which are the spouses of the unrelated individuals, is non-qualifying real property within the meaning of subsection 110.6(1).
2.Whether the shares of a corporation (owned by unrelated individuals) that owns real property that is used in an active business by a partnership constitute "non-qualifying real property".
Position TAKEN:
1.The real property constitutes "non-qualifying real property" since it is owned jointly by unrelated individuals.
2.The shares constitute "non-qualifying real property" since the property is used in an active business by the spouses of unrelated individuals.
Reasons FOR POSITION TAKEN:
E9227765
5-940136
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
July 22, 1994
Dear Sirs:
Re: Capital Gains Exemption - "Non-Qualifying Real Property"
We are writing in reply to your letter of January 7, 1994 wherein you requested our comments on the application of subsection 110.6(1) of the Income Tax Act (the "Act") in a situation involving the disposition of real estate.
Your concern relates to the sale of a 50% interest in real estate by a partnership or joint venture to a related corporation under section 85 of the Act. In your example, the real estate is rented by the partnership or joint venture to a partnership carrying on an active business, the partners of which are the spouses of the individuals who are partners in the first mentioned partnership or joint venture. Following this sale, the partnership will be wound-up and the partners will receive shares of the related corporation which they will then sell to discretionary family trusts.
You ask whether the sale of the 50% interest in the property to the corporation and the disposition of the shares to the discretionary family trusts would be considered a disposition of "non-qualifying real property" within the meaning of subsection 110.6(1) of the Act.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, as in your case, the enquiry should be addressed to the relevant District Office. The following comments are, therefore, of a general nature only, and are not binding on the Department. These comments should not be considered as confirming that the property in question is capital property generating capital gains rather than income.
With respect to your question regarding the sale of the 50% interest in the property by the partnership to the corporation, subparagraph (a)(iii) of the definition of "non-qualifying real property" would apply since that subparagraph deals with real property owned by a partnership. Real property owned by a partnership will be excluded from the definition of "non-qualifying real property" if it was used principally in an active business carried on by one of the persons described in any of clauses (a)(iii)(C) to (G). In the situation you have described, since the property is used in a business carried on by another partnership and since a partnership is not one of the persons described in clauses (C) to (G) of subparagraph (iii), the real property would be included in the definition of "non-qualifying real property".
If the 50% interest in the property was held not by a partnership but by a joint venture comprised of the individual spouses, subparagraph (a)(ii) of the definition of "non-qualifying property" would be relevant since it deals with real property owned by an individual. Where the real property is used principally in an active business carried on by one or more persons as members of a partnership, clause (a)(ii)(G) of the definition requires that interests representing all or substantially all of the fair market value of all partnership interests in the partnership be owned by one or more persons described in subparagraph (a)(ii). The question therefore is whether the persons owning the partnership interests (i.e., the spouses of the unrelated individuals) are described in Clause (a)(ii)(E) which includes a spouse of the individual. The individual referred to is the individual described in the preamble of the definition of "non-qualifying real property" who disposed of the real property in question. In our view, the expression "a spouse of the individual" cannot be interpreted as a reference to more than one individual. Thus, spouse A is not "a spouse of the individual" if the individual referred to is individual B. Therefore, if the real property were owned by a joint venture, it would constitute "non-qualifying property" since the real property would be owned jointly by unrelated individuals.
As regards your question regarding the disposition of the special shares of the related corporation to the discretionary family trusts, paragraph (b) of the definition of "non-qualifying real property" would apply since it concerns shares of a corporation, the fair market value of which is derived principally from real property. Shares of a corporation that owns real property will be excluded from the definition of "non-qualifying real property" if the real property was used principally in an active business carried on by one of the persons described in any of clauses (a)(ii)(C) to (H). Although the real property is used in a business carried on by one or more persons as members of a partnership, for reasons stated in the above paragraph, the shares would nevertheless constitute "non-qualifying real property" since the partnership interests are held by the spouses of unrelated individuals.
Unless as otherwise stated, all references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993.
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
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