12 August 1994 External T.I. 9401555 - CAPITAL GAINS EXEMPTIOON

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:

-Whether the assets of a partnership are looked at for the purpose of the asset test in the definitions of a qualified small business corporation share and small business corporation when determining whether the shares of the corporate partner qualify.

-Whether a corporate partner would be considered to be carrying on business throughout a year and in subsequent years when it transfers its business to a partnership.

Position TAKEN:

-Yes
-Yes

Reasons FOR POSITION TAKEN:

-Previous Departmental positions (file # 921935)
-question 58-1993 Round Table
-question 14-1991 Round Table

				940155

XXXXXXXXXX		B. Kerr

Attention: XXXXXXXXXX

August 12, 1994

Dear Sirs:

Re: Business Carried on by Corporate Limited Partners

This is in response to your letter of January 21, 1994, wherein you requested our views with respect to the nature of business activities carried on by limited partners of a limited partnership. 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 have described a situation involving a Canadian-controlled private corporation that carries on an active business in Canada as an insurance broker and in its preceding taxation year deducted a reserve under subsection 32(3) of the Act. The corporation and other arm's length third parties that also carry on active business in Canada as insurance brokers will establish a limited partnership and the corporation along with the other limited partners will each transfer their insurance brokerage business to the partnership. The corporation will be entitled to 60% of the profit or loss of the partnership. The corporation will lease the office building that it owns and from which it conducted its insurance brokerage business to the partnership. All of the partnership's assets will be used in an active business carried on in Canada.

For the purpose of the definitions of a "qualified small business corporation share" in subsection 110.6(1) and a "Small business corporation" in subsection 248(1) of the Act, you have asked us to confirm that the corporation would be considered to use its proportionate share of the fair market value of the partnership's assets in an active business carried on in Canada and that the entire value of the office would be considered to be used in an active business. You have also asked us to confirm that for the purposes of subsection 32(3) of the Act, that the corporation would be considered to be carrying on business as an insurance broker throughout the year in which it transfers the business to the partnership and in subsequent years.

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.

For the purposes of subparagraph 110.6(1)(c)(i) of the definition of a "qualified small business corporation share" more than 50%, or for the purposes of paragraph 248(1)(a) of the definition of a "Small business corporation" all or substantially all, of the assets of the corporation referred to therein must be attributable to assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it.

It is our view, as stated in paragraph 5 of Interpretation Bulletin IT-486R, that an asset is used in a business if its primary or principal use (ie. more than 50% of its use) is in respect of that business. In addition to the comments in IT-486R concerning the expression "all or substantially all" the Department considers this expression to mean 90%, as was stated in response to question 14 at the 1991 Revenue Canada Round Table ("Round Table") held at the 1991 Canadian Tax Foundation Annual Conference ("CTF").

It is our view, as stated in paragraph 6 of IT-486R, that "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 corporations 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." This would also be our view with respect to the "more than 50%" of the corporations assets test. In addition, as stated in response to question 58 at the Round Table held at the 1993 CTF, this position applies for limited partners as well as for general partners.

Accordingly, assets leased by the partnership from a corporate partner for use in its active business will be considered to be used in an active business carried on by the corporate partner. Provided that more than 50% of the asset is used in the business of the partnership, the entire value of the asset will qualify as being used in an active business carried by the partnership and each corporate partner's respective ownership interest in that asset will qualify.

With respect to a corporation which carries on business as an insurance agent or broker and subsequently transfers that business to a partnership of which it is a partner and which partnership continues to carry on that same business, it is the view of the Department that, for the purposes of subsection 32(3) of the Act, the corporation will be considered to have carried on that business throughout the year in which the business is transferred to the partnership and will also be considered to be carrying it on indirectly in subsequent years through the partnership.

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