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.For the purpose of determining the 30% rule of a small business limited partnership, would the General Partner's unit(s) be included as part of the calculation?
2.Where, for purposes of registering a small business investment limited partnership under the applicable Partnership Act, one "nominal" limited partnership unit is issued, will the 30% rule in paragraph 5102(1)(e) of the Regulations be contravened?
Position:
1.None of the partnership unit(s) owned by the General Partner would be used in the calculation.
2.Yes
Reasons:
1.It would be too easy to circumvent the 30% rule if general partnership unit(s) were included in the calculation.
2.The preamble of subsection 5102(1) specifically states "... at any time if at all times after it was formed and before that time...". Therefore the 30% rule must be adhered to at all times (including at the time the partnership is formed) otherwise the partnership would be tainted.
5-960091
XXXXXXXXXX Franklyn S. Gillman
Attention: XXXXXXXXXX
July 31, 1996
Dear Sirs:
Re: Small Business Investment Limited Partnership
This is in reply to your letters of January 3 and January 26, 1996 wherein you requested clarification as to the application of subsection 5102(1) of the Income Tax Regulations (the "Regulations"). We apologize for the delay in responding which is attributable to fact that we were obliged to give priority to several advance income tax ruling requests.
Subsection 5102(1) of the Regulations defines a small business investment limited partnership ("SBILP") for purposes of the definition of small business property at subsection 206(1) of the Income Tax Act. The preamble to subsection 5102(1) of the Regulations specifically states that a partnership is a SBILP at a particular time if the conditions enumerated in paragraphs a - i in the subsection are achieved by the partnership "... at all times after it was formed and before that (particular) time...". Pursuant to paragraph 5102(1)(e) of the Regulations no limited partner or group of limited partners who did not deal with each other at arm's length may hold more than 30% of the outstanding units of the partnership. It is therefore our opinion that a partnership will fail to qualify as a SBILP if, when it is formed, only one limited partnership unit is issued to a person solely for the purpose of registering the partnership, since the 30% rule would not be adhered to.
When calculating the 30% limit at paragraph 5102(1)(e) of the Regulations, it is our view that the reference to units of the partnership in the preamble of paragraph (e) is restricted to limited partnership units held by limited partners. It is our opinion that paragraph 5102(1)(e) of the Regulations is only concerned with limited partnership units. If the general partnership unit(s) of the partnership were used in calculating the 30% limit, the paragraph may prove to be ineffectual in that it would be easy to manipulate the number of general partnership units issued by the partnership to by- pass the percentage restriction placed on the ownership of limited partnership units owned by the limited partners of the partnership.
These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case.
As stated in paragraph 21 of Information Circular 70-6R2 written opinions are not advance rulings and, accordingly, are not binding on the Department.
We trust these comments will be of assistance.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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