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:
When 2 corporations carry on operations at a site but subsequently continue the operations after forming a partnership amongst themselves, for purposes of applying class 24 to pollution control equipment acquired by the partnership, can the partnership be considered to having carried on the operations prior to its formation?
Position TAKEN:
Yes
Reasons FOR POSITION TAKEN:
The combined effect of subsection 96(1) and Regulation 1102(1a) is that paragraph 20(1)(a) deductions are taken into account at the partnership level and cannot be claimed again by the individual partner. However, a partnership is not a legal entity but is made up of its individual members and when applying the condition of "carrying on operations at the site prior 1974", one must look behind the partnership to the individual partners. In the situation under review the individual partners had carried on the operations at the site as individuals prior to the partnership's existance and at the same percentages as their interest in the partnership.
August 30, 1995
L. C. Tremblay Merchandising, Manufacturing
Director and Partnerships Section
Appeals and Referrals Division Franklyn S. Gillman
Appeals Branch 957-9768
Attention: Don Beamish
8-951738
XXXXXXXXXX
This is in reply to your memorandum of July 4, 1995 wherein you requested a technical interpretation regarding class 24 of Schedule ll of the Income Tax Regulations (the "Regulations").
Our understanding of the facts are as follows:
XXXXXXXXXX
Pursuant to clause (b)(iii)(C) of class 24 of the Regulations a necessary factor that must be fulfilled by the taxpayer so that the asset qualifies for inclusion in the class, is that the taxpayer must have "... carried out operations at the site in Canada at which operations have been carried on by him from a time that is before 1974, ..."
Taxpayer is defined at subsection 248(1) which states:
"taxpayer" includes any person whether or not liable to pay tax;
The D.O's concern arises because a partnership is not a "person" within the definition of this term in subsection 248(1).
The intent of the regulation is to ensure that these incentive provisions apply only to the original taxpayer. This is consistent with the wording in clauses (b)(iii)(C) and (E) of class 24 which require continual operation by the taxpayer from before 1974.
In 1991 the regulation was amended so as to allow an amalgamated corporation or in the case of a wind-up, the parent, to take advantage of the accelerated write off when the equipment was acquired by the successor of a taxpayer who had previously qualified. The December 23, 1991 technical notes accompanying the release of the draft regulations at that time indicate that the intent was to "provide an accelerated rate of capital cost allowance for pollution control equipment acquired by a taxpayer for use at a site where the taxpayer has been carrying on business since before 1974...to allow pollution control equipment acquired by the successor of such a taxpayer after an amalgamation...occurring after 1973, to continue to qualify for inclusion in those classes".
In the case at hand we do not perceive a need for a similar rule to warrant a partnership from taking advantage of this accelerated write-off when all the partners in their own right had been carrying on operations at the site prior to 1974 and in the same percentage as their partnership interest is in the partnership.
In common law, a partnership is not a legal entity. As cited by McNair J. in Norco Development Ltd. 85 DTC 5213 (F.C.-T.D.), in Income Tax Commissioners for City of London v. Gibbs, (1942) A.C. 402, Viscount Simon L.C., said at page 415:
"...As a strict proposition of English law, there is no doubt at all that a partnership is not, as such, a single juristic person. As Farwell L.J. said in Sadler v. Whiteman, (1910) 1 K.B. 868 at 889; `In English law a firm, as such, has no existence; partners carry on business both as principals and as agents for each other within the scope of the partnership business; the firm name is a mere expression, not a legal entity, although for convenience under Order 48A it may be used for the sake of suing and being sued.' And again: `It is not correct to say that a firm carries on business; the members of the firm carry on business in partnership under the name and style of the firm."
McNair J. then goes on to say at page 5217:
"the rule in Sadler v. Whiteman was cited with approval by the Ontario Court of Appeal in Kaltenback v. Frolic Industries Ltd., (1948) 1 D.L.R. 689. There is no doubt that the rule has gained full acceptance in Canada."
and further on he states
"In my opinion, Noort Developments, is not a legal entity. Section 96 of the Act provides rules for the computation of partnership income. The partnership is envisaged as a separate person solely for the purpose of measuring the flow of income to the individual partners, which is then taxed in their hands. It is the partners and not the firm itself which are the alleged subject of taxation."
From the above we are able to perceive that in common law it is the partners who own (in undivided ownership) the assets of the partnership, and it is also the partners who carry on the business of the partnership.
In order to apply class 24 to a particular asset it is a requirement that the taxpayer claiming the capital cost allowance on the asset has been carrying on operations at a site in Canada since before 1974. Given the above, the taxpayer referred to in class 24 for purposes of partnership assets is the individual partner. Therefore, one must pierce the partnership veil to discern who all the individual members of the partnership are in order to determine whether all the taxpayers have been carrying on operations at the site since before 1974.
It therefore follows that since XXXXXXXXXX are considered under Common Law to be the undivided owners of the assets of the Partnership, they were the ones carrying on the mining operations and therefore the enhanced capital cost allowance rate under class 24 would be available to them. It should be noted that our position may be different if the partnership was formed under Quebec law.
Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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