26 October 1994 External T.I. 9418315 - NON-QUALIFYING 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 ISSUE:

Whether real property owned by a partnership, the members of which are two unrelated individuals, and used in an active business by a corporation, the shareholders of which are the same two unrelated individuals, is non-qualifying real property within the meaning of subsection 110.6(1).

Position TAKEN:

The real property constitutes "non-qualifying real property" since the shares of the corporation that uses the real property in an active business are owned by unrelated individuals.

Reasons FOR POSITION TAKEN:

The expression "the individual" in clause (a)(ii)(C) cannot be interpreted as a reference to more than one individual.

		5-941831
XXXXXXXXXX	C. Chouinard

Attention: XXXXXXXXXX

October 26, 1994

Dear Sir:

Re: Capital Gains Exemption - "Non-Qualifying Real Property"

We are writing in reply to your letter of July 8, 1994, wherein you asked us to confirm your interpretation of the definition of "non-qualifying real property" in subsection 110.6(1) of the Income Tax Act (the "Act") in three different situations involving a partnership and an operating corporation.

In the first situation you describe, two unrelated individuals (A and B) are equal partners in a partnership which owns real estate that is used by a corporation ("Opco") of which they are the only two shareholders. In the second situation you describe, A and B hold their shares in Opco through separate holding corporations, Aco and Bco. The third situation differs only in that A and B hold their shares in Opco through one holding corporation ("Holdco"), instead of two.

In your view, the partnership interests held by A and B in the first situation would not constitute "non-qualifying real property" since the real estate owned by the partnership is used in an active business by a corporation, the shares of which are owned by one or more persons described in subparagraph (a) of the definition of "non-qualifying real property". In the second and third situations, you have determined that the partnership interests held by A and B are "non-qualifying real property", since A and B do not own the shares of Opco directly. In your opinion, the difference, as regards the partnership interests, between the first situation and the other two situations, is the result of a technical anomaly which arises from the use of the word "owned" in clause (a)(ii)(F) of the definition of "non-qualifying real property", instead of the word "controlled".

Our Comments

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, 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.

Paragraph (c) of the definition of "non-qualifying real property" will apply in the situations you describe since that paragraph deals with partnership interests, the fair market value of which is derived principally from real property. Such partnership interests are excluded from the definition of "non-qualifying real property" if the real property of the partnership is used principally in an active business carried on by members of the partnership or by persons described in any of clauses (a)(ii)(C) to (H). Where the real property is used principally in an active business carried on by a corporation, clause (a)(ii)(F) of the definition requires that the shares of the corporation be owned by one or more persons described in subparagraph (a)(ii). The question, therefore, is whether the persons owning the shares of Opco (i.e., A and B) are both described in subparagraph (a)(ii). The individual referred to in clause (a)(ii)(C) is the individual described in the preamble of the definition of "non-qualifying real property", that is, the individual who disposed of the real property in question. In our view, the expression "the individual" cannot be interpreted as a reference to more than one individual. Thus, A is not "the individual" if the individual referred to is individual B. Therefore, in the first situation you describe, since the shares of Opco are owned by unrelated individuals, the partnership interests held by A and B would, in our opinion, constitute "non-qualifying real property".

As regards the second and third situations you describe, since the shares of Opco in both those situations are not owned by one or more persons described in subparagraph (a)(ii), we agree that the partnership interests held by A and B in both those situations would constitute "non-qualifying real property".

In light of the above comments, it is our opinion that there is no anomaly in the definition of "non-qualifying real property" in the circumstances you have described.

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