13 March 1996 Internal T.I. 9616890 - CALGARY TAX SERVICES ROUND TABLE - QUESTION 25

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 25

Definition of a excluded interest

a)Subsection 40(3.15) of the Income Tax Act (the "Act") defines a "excluded interest" for the purposes of the exception from the rule in subsection 40(3.1) that deems a capital gain to have been realized in circumstances in which a partnership interest has a "negative" adjusted cost base. An interest in a partnership at the end of a fiscal period of the partnership is an excluded interest if, at that time, the partnership actively carries on a business that was carried on by it continuously since February 22, 1994 (or earns income from a property that was owned by it throughout that period). However, a partnership interest will lose its status as an excluded interest if, after February 22, 1994, there has been a substantial contribution of capital to the partnership or a substantial increase in the indebtedness of the partnership. Does the Department have any guidelines as to what constitutes a substantial contribution of capital to the partnership or a substantial increase in the indebtedness of the partnership?

b)Would it make any difference if the "substantial" increase in capital or debt were the result of the partnership furthering its normal business activities such as an acquisition of equipment?

Department's position

The question to determine whether a capital contribution or an increase in debt is substantial is a question of fact which can only be determined following a review of all of the relevant facts pertaining to the particular situation. Accordingly, the Department does not provide any specific guidelines to determine what constitutes a substantial contribution of capital to the partnership or a substantial increase in the indebtedness of the partnership. However, subsection 40(3.16) of the Act describes various circumstances where contributions to, or borrowing by, a partnership will not be considered to be substantial for the purpose of the grandfathering rules in subsection 40(3.15) of the Act. In particular, paragraph 40(3.16)(d) of the Act provides that an amount will be considered not to be substantial where the amount was used for an activity that was carried on by the partnership on February 22, 1994 but not for a significant expansion of the activity nor for the acquisition or production of a film production. It is a question of fact to be determined in each case as to whether substantial contributions of capital or substantial increases in indebtedness are used for a significant expansion of the activities of a partnership for the purpose of paragraph 40(3.16)(d) of the Act.

Johanne Desparois
5-961689
March 13, 1996