6 April 1995 External T.I. 9507605 - CAPITAL GAINS ELECTION - INVESTMENT CLUBS

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 investment club can file the capital gains election.

Position TAKEN:

Election can be filed.

Reasons FOR POSITION TAKEN:

Investments clubs are either trusts, partnerships or association of investors treated as partnerships for tax purposes.

				5-950760

XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

April 3, 1995

Dear Sir:

Re: Investment Clubs and the Capital Gains Election

We are writing in reply to your letter of March 20, 1995 in which you requested our comments regarding the capital gains election as it applies to investment clubs.

The Department has indicated in Information Circular 73-13 (a copy of which is enclosed) that, for tax purposes, it will treat an investment club as if it were a partnership. However, the Circular only applies to ordinary investment clubs where each member owns an undivided interest in each security or other asset held by the club and does not apply to clubs that are partnerships, trusts or corporations.

You have indicated in your letter that, in past years, the club has filed trust returns and allocated all of its income and capital gains to members. In a telephone conversation (Chouinard/XXXXXXXXXX), you indicated that the club's decision to file as a trust was made without any consideration as to whether the club is a trust, a partnership or an association of individual investors, each owning an undivided interest in each security held by the club, since all of the income and capital gains of the club are flowed out to members annually. We cannot determine from the information you have provided whether the investment club is a trust, a partnership or an association of investors. Accordingly, we will provide comments relating to all three arrangements.

As we indicated during our telephone conversation, if the investment club is a trust, it is not entitled to make the capital gains election, since only personal trusts can make the election. "Personal trust" is defined in subsection 248(1) of the Income Tax Act (the "Act") as either a testamentary trust or an inter vivos trust, no beneficial interest in which was acquired for consideration payable directly or indirectly to the trust. We assume that in order to become a member of the investment club, an individual must make a monetary contribution to the club's pooled fund. Accordingly, in our view, the investment club would not meet the definition of "personal trust" and could not make the capital gains election.

If, on the other hand, the investment club is either a partnership or an association of investors which has elected the modified partnership basis as described in paragraph 14 of Information Circular 73-13, the capital gains election can be filed by each member of the club in respect of the member's partnership interest, pursuant to subsection 110.6(19) of the Act. Subject to the penalty provisions, if such an election is filed, the member will be deemed to have disposed of his or her partnership interest for proceeds of disposition equal to the greater of the amount designated in the election or the adjusted cost base of the partnership interest, as adjusted under subsection 110.6(23) of the Act. This will give rise to a capital gain to the extent the elected amount exceeds the adjusted cost base of the member's partnership interest. However, the deemed capital gain does not give rise to a bump-up of the cost of the partnership interest by virtue of clause 110.6(19)(a)(ii)(A) of the Act. Instead, the capital gain is added to a special account defined in subsection 39.1(1) of the Act as the "exempt capital gains balance". This account can be used for any taxation year that ends before 2005, to shelter both capital gains that may arise on a future disposition of the partnership interest by the member and capital gains that are flowed out to the member by the partnership in respect of the member's interest in the partnership, such as, in this particular case, those that may arise on a disposition of securities by the club. If, at the end of the year 2004, a member has not used up his or her exempt capital gains balance in respect of the interest held in the investment club, the unused portion of the exempt capital gains balance will be added to the adjusted cost base of the member's remaining interest in the club. Therefore, since the election is filed, not by the partnership, but by each individual partner, a member can file an election in respect of his or her partnership interest without there being consequences for the other members.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch