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.
1994 Canadian Tax Conference
Use of a Partner's Assets by a Partnership
In response to Question 23 of the 1981 Canadian Tax Foundation Round Table, the Department took the position that when assets are owned by a partner and used by the partnership, the partner is allowed to claim capital cost allowance ("CCA") provided that a fair market value rent is charged to the partnership. If reasonable rent is not charged, the Department's view was that the property is not held by the partner for the purpose of gaining or producing income and is excluded by virtue of paragraph 1102(1)(c) of the Regulations from the Schedule II classes.
It would follow from this position that interest paid with respect to money borrowed by a partner to purchase assets which are used by the partnership without charge would not be deductible under paragraph 20(1)(c) by the partner because the money was not used for the purpose of earning income from a business or to acquire property for the purpose of gaining or producing income from a business.
The Department has recently completed a review of this position. It is now our position that where a property is acquired by a partner for the purpose of making it available to the partnership1 to be used in carrying on the business of the partnership, the property will be considered to have been acquired by the partner for the purpose of earning income if the partnership business is carried on with a view to profit, notwithstanding the fact that the partner does not charge rent to the partnership.
Although subsection 96(1) establishes the fiction that, for the purposes of computing the income of a partner, the computation shall first be made at the partnership level as if the partnership were a separate person, paragraph 96(1)(f) provides that the income of the partner shall be computed as if:
the amount of the income of the partnership for a taxation year from any source ... were the income of the taxpayer from that source ....
That a partner has a source of business income which is the business that is conducted in the name of the partnership is supported by the decision in Norco Development Ltd. v. Her Majesty The Queen, 85 DTC 5213 (FCTD).
However, we are also of the view that the right to use the asset is property for the purposes of subsection 97(1). Accordingly, when the partnership acquires the right to use the property of the partner, the partner will be deemed by subsection 97(1) to have disposed of that right for proceeds equal to its fair market value.
Tim Bryant
November 30, 1994
942927
1 These comments assume that the partner continues to own the property, and that the property does not become property of the partnership.
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