12 July 1996 External T.I. 9610635 - EXCLUDED INTEREST IN A PARTNERSHIP

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 a new partnership with different partners carrying on a similar business is a particular business that is a substituted business for the purposes of section 34.2 when the existing partnership still carries on business but at a reduced level of operations.

Position:

Question of fact.

Reasons:

In the situation where two partnerships are carrying on similar businesses, can one be a substitute for the other?

Where the two partnerships have different partners, can one be the substitute of the other for a particular partner who is a member of both partnerships?

            961063
XXXXXXXXXX  A. Seidel

Attention: XXXXXXXXXX

July 12, 1996

Dear Sirs:

Re: Excluded Interest in a Partnership

This is in reply to your letter dated March 21, 1996 with respect to a general partnership interest being an "excluded interest", within the meaning thereof in subsection 40(3.15) of the Income Tax Act (the "Act"), subsequent to a disposition of a portion of the partnership's business assets.

The situation described in your letter appears to relate to specific taxpayers and actual fact situations. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments with respect to subsection 40(3.15) of the Act.

In general terms, subsection 40(3.1) of the Act deems a specified member of a partnership to recognize as a gain from a disposition, any negative amount in the adjusted cost base of the specified member's partnership interest. There is an exception to the application of subsection 40(3.1) of the Act if the specified member's partnership interest is an excluded interest under subsection 40(3.15) of the Act.

Subsection 40(3.15) of the Act requires that the partnership actively carry on a business that was carried on by it throughout the period beginning February 22, 1994 or that the partnership earn income from a property owned by it since February 22, 1994 and there has not been a substantial contribution of capital or a substantial increase in the indebtedness of the partnership.

Whether or not a partnership continues to actively carry on a business that was carried on by it throughout the period beginning February 22, 1994 after it has sold a 50% undivided interest in all of its assets and then continues to carry on the business through a joint venture or partnership with the purchaser is a question of fact that can only be determined after a review of all of the circumstances of a particular situation.

In the situation where a general partnership carries on a processing business that it carried on continuously since February 22, 1994, sells a 50% undivided interest in all of the assets comprising that processing business, and then enters into a new partnership or joint venture agreement with the purchaser to actively carry on that same processing business, it is generally our view that for the purposes of subsection 40(3.15) of the Act, the general partnership may still be considered to be actively carrying on the same processing business that was being carried on before the sale of the undivided interest.

These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2 and are therefore not binding on Revenue Canada.

Yours truly,

for Director
Resources, Partnerships & Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch