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 a capital gain on the disposition of an interest in a partnership which operates a mobile home park qualifies for the $500,000 capital gain exemption?
2.Whether the election to claim the $100,000 capital gains exemption on pre-Budget day accrued capital gains is available to individuals owning partnership interests?
Position TAKEN:
1.No.
2.Yes, but only the pre-March 1992 gains, since the partnership interests and partnership's properties are non-qualifying real property.
Reasons FOR POSITION TAKEN:
1.The partnership interest is not a qualified small business corporation share or a qualified farm property.
2.The fair market value of the partnership interest is derived principally from the mobile home park which is not an active business. Ref. 5-932295 and 5-932113.
5-941149
XXXXXXXXXX L. Roy
Attention: XXXXXXXXXX
July 14, 1994
Dear Sir\Madam:
Subject: Capital Gains Exemption
This is in reply to your letter of April 15, 1994 in which you requested our opinion on whether the $500 000 capital gains exemption or the election to recognize pre-budget day accrued capital gains up to the $100,000 exemption, is available in respect of a partnership interest.
The situation described in your letter appears to involve actual proposed transactions with identifiable taxpayers. 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, dated September 28, 1990. Where the particular transactions are completed, the enquiry should be addressed to the relevant district taxation office. However, we offer you the following general comments which may be of assistance to you.
Due to the technical complexity of the provisions of the Income Tax Act concerning the capital gains exemption, the following comments are meant only to provide an overview of the relevant provisions and under no circumstances are they to be considered to be either comprehensive or all inclusive. If you have more specific queries regarding the relevant provisions of the Act, we would be pleased to address them.
The $500,000 capital gains exemption does not apply to the disposition of an interest in a partnership or property owned by the partnership, where neither the partnership nor an individual partner has ever carried on the business of farming in Canada. Although the $500,000 capital gains exemption does not apply to such disposition, the individual may claim the $100,000 capital gains exemption. In this regard, please note that the February 22, 1994 federal budget proposes to eliminate this exemption for gains accruing after February 22, 1994.
However, pursuant to the budget proposals, individuals will have the opportunity, when filing their 1994 income tax returns, to make an election for capital property owned on February 22, 1994, to recognize pre-budget day accrued capital gains up to their unused $100,000 exemption. The election will treat the properties selected by the individual as having been disposed of on February 22, 1994 and immediately reacquired. The adjusted cost base of the property selected will be increased by the amount of the gain recognized. This election will be available with respect to partnership interests.
Furthermore, it is proposed that partnerships will be permitted to recognize pre-budget day accrued capital gains on partnership property by filing an election. Each asset covered by the election will be treated as having been disposed of by the partnership on budget day for proceeds equal to the elected amount, and immediately reacquired for the same amount.
The budget provides that where real property of a partnership or an interest in a partnership the fair market value of which is derived principally from real property, other than real property used principally in an active business, only the pre-March 1992 gains will be recognized. The portion of the gain that is eligible must be calculated as the accrued capital gain on budget day multiplied by the ratio that the number of calendar months in the period that commences with the calendar month in which the property was acquired and ends with February 1992 is of the number of calendar months in the period that commences with the calendar month in which the property was acquired and ends on February 1994.
An active business is any business carried on by a taxpayer or a partnership other than a business the principal purpose of which is to derive income from property (including rental income), unless the taxpayer or the partnership employs in the business more than five full-time employees or in the course of carrying on the business uses services equivalent to those that could reasonably be expected to be provided by more than five full-time employees.
Whether or not a partnership is carrying on an active business is a question of facts. However, it is our view, with respect to a partnership having less than six full-time employees, engaged principally in providing rental spaces for mobile homes and offering no more than normal services such as grounds maintenance and snow removal, that it would not be considered to be conducting an active business and only the pre-March 1992 gains could be recognized.
The foregoing comments are not rulings and in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.
We trust that these comments will be of assistance to you.
Yours truly,
Director
Financial Industries Division
Rulings Directorate
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