13 March 1996 APFF Roundtable Q. 24, 9616880 - CALGARY TAX SERVICES ROUND TABLE - QUESTION 24

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.

CALGARY TAX SERVICES ROUND TABLE

Question 24

Definition of a specified member

a)Subsection 248(1) of the Income Tax Act defines a "specified member" as a member of a partnership who is, inter alia, not "actively engaged in those activities of the partnership business other than the financing of the partnership business". Does the Department have any guidelines as to what constitutes being actively engaged in the business of the partnership?

b)Many business arrangements are structured as partnerships with one partner being designated as the "managing partner". Other partners would participate as member(s) of a management committee approving operating and capital budgets and being consulted on activities that exceed the managing partner's operating authority. Would this level of activity be sufficient to be considered as being actively engaged in those activities of the partnership business?

Department's position

The question to determine whether a member of a partnership is actively engaged in the activities of the partnership business is a question of fact which can only be determined following a review of all of the relevant facts pertaining to the particular situation. Therefore, as mentioned at the 1992 annual conference of the Association de planification fiscale et financière, the Department does not provide any specific guidelines to determine whether a member of a partnership is actively engaged in the activities of a partnership business. However, the Department considers that a person is actively engaged in the activities of a partnership business when that person is directly involved in the management and/or the daily activities of the business other than the financing of the partnership business. Criteria such as time, work and energy that a person devotes to the business are also considered. Moreover, the participation of the member must be regular, continuous and substantial. This criteria would not be met, for example, if the member's activities and efforts were infrequent or were provided at irregular intervals. On the facts described in b) above, it appears that a partner's participation in a management committee that sets budgets and makes decisions on an exception basis only would not meet the criteria mentioned earlier and accordingly the partner could be considered as a "specified members".

Johanne Desparois
5-961688
March 13, 1996

L1993 E3M05210 APFF 1992

Question 47

Scientific research and experimental development

A partnership is created to market research results in the area of informatics, in particular in the area of expert systems. Those in charge of scientific research and experimental development projects (R&D) are developing, among other things, various programs involving member participation. These participation activities consist of answering questionnaires aimed at better defining user interfaces and validating the R&D work.

Instead of surveying and sampling the population in general, it is the members (who do not necessarily have experience in the area of R&D or informatics) who respond to these surveys. Moreover, the members meet from time to time with project representatives so that the latter can bring them up to date on the progress of the work and to approve decisions and budgets. While the R&D work was being carried out, regular reports were issued to the partners.

Does the Department of National Revenue think that the partners'activities were sufficiently developed for them not to be considered as specified members? Can the Department of National Revenue or the Department of Finance provide a definition of "actively engaged in the activities of the partnership business on a regular, continuous and substantial basis" by indicating the factors that should be evaluated (hours per year, number of meetings and so on)?

Department of National Revenue response

In order to determine whether the activities of members are sufficiently developed for them not to be considered as "specified members", the particular facts of a situation must be reviewed as a whole. In addition, the Department has not prepared exhaustive guidelines regarding the expression "actively engaged in the activities of the partnership business on a regular, continuous and substantial basis" for defining "specified member" in subsection 248(1) of the Act, since each case must be analyzed on its own facts.

However, the Department considers that a person is actively engaged in a business when that person is directly involved in the management and/or the daily activities of the business. As a general rule, the person devotes time, work and energy to the business. The quantity and quality of his efforts must also be taken into consideration in determining his share in the income of the business. Moreover, the participation of the member must be regular, continuous and substantial. This criteria would not be met, for example, if the member's activities and efforts were infrequent or were provided at irregular intervals. While respecting the requirement of regular, continuous and substantial participation, the Department considers that the more a member is involved in the management and/or the current activities of the business, the less likely it is that the member would be considered a "specified member" in terms of subsection 248(1) of the act. On the facts described above, it seems to us that the members' activities do not meet the criteria mentioned earlier and accordingly they would be considered "specified members".