4 July 1997 External T.I. 9636835 - QSBCS - 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 the following rights or interests are assets used principally in an active business carried on primarily in Canada by a Canadian-controlled private corporation for the purpose of the definition of "qualified small business corporation share" (QSBCS) under subsection 110.6(1) of the Act and the definition of "small business corporation" under subsection 248(1) where the partnership uses all or substantially all of the fair market value of its assets in an active business carried on in Canada where the particular right or interest is:

1. an interest in a limited partnership;
2. a residual interest in a partnership, as described in section 98.1 of the Act; or
3. a right to an allocation of a share of the income or loss of the partnership, as described in subsection 96(1.1) of the Act.

Position:

1. Where a corporation has a partnership interest as one of its assets, it is the underlying partnership's assets (to the extent of the corporation's interest therein) that are used in determining whether all or substantially all of the corporation's assets are used in an active business for the purpose of the definition of small business corporation under subsection 248(1) of the Act and for the purpose of the definition of QSBCS under subsection 110.6(1) of the Act. Provided that these assets are used in an active business carried on primarily in Canada by the partnership, they will qualify as being used by the partner in an active business carried on primarily in Canada by the corporation.

2. None.

3. The position described in 1. above does not apply to a right to an allocation of the income or loss of the partnership, as described in subsection 96(1.1) of the Act. That right is not an asset used in an active business carried on primarily in Canada by the corporation.

Reasons:

1. Question 58 - CTF 1993 Round Table and previous Departmental positions.

2. It would be necessary to determine whether the residual interest in the partnership gives the partner an interest in particular assets of the partnership that are used in an active business carried on primarily in Canada. We are prepare to consider that a residual interest could be an asset used principally in an active business carried on primarily in Canada by the partner if the particular assets to which the residual interest relates are used principally in an active business carried on primarily in Canada by the partnership and if the right to those assets is the only right of the partner. In all other situations, our response would depend on the facts and the particular partnership agreement.

3. Where the partner is retired and receives an allocation of a share of the income or loss of the partnership, as described in subsection 96(1.1) of the Act, the retired partner does not have an interest in the underlying partnership's assets. The position outlined above applies when a partner has an interest in the underlying partnership's assets. Subsection 96(1.1) does not deem the partner to be carrying on the business of the partnership. Subsection 96(1.6) does not deem a taxpayer to carry on an active business and the provisions of that subsection do not apply to subsection 110.6(1).

5-963683
XXXXXXXXXX Sylvie Labarre

Attention: XXXXXXXXXX

July 4, 1997

Dear Sirs:

Re: Qualified small business corporation share

This is in reply to your letter dated October 28, 1996 in which you inquire whether a share of a Canadian-controlled private corporation would be a "qualified small business corporation share" (QSBCS) within the meaning of subsection 110.6(1) of the Income Tax Act ("Act") in the situation where the corporation's only asset is an interest in a partnership and where the partnership uses all or substantially all of the fair market value of its assets in an active business carried on in Canada. We apologize for the delay in responding to your request.

You requested our opinion in the following situations:

-the interest in the partnership is a limited partnership interest;

-the interest in the partnership is a residual interest in the partnership, as described in section 98.1 of the Act;

-the partner is retired and receives an allocation of a share of the income or loss of the partnership, as described in subsection 96(1.1) of the Act.

As explained in Information Circular 70-6R3, it is not the Department's practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts, the partnership agreement and any other documentation to the appropriate Tax Services Office for their views. We are therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Our comments

The information that was provided with your request does not enable us to determine whether a share of a Canadian-controlled private corporation would be a "QSBCS" within the meaning of subsection 110.6(1) of the Act in the situation where the corporation's only asset is a limited partnership interest or where the corporation's only asset is a residual interest in the partnership, as described in section 98.1 of the Act, as it is a question of fact as to whether all the requirements of subsection 110.6(1) of the Act are met.

For the purpose of subparagraph 110.6(1)(c)(i) of the definition of QSBCS more than 50%, or for the purposes of subsection 248(1) of the definition of a "small business corporation" all or substantially all, of the assets of the corporation referred to therein must be attributable to assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it.

It is our view that where a corporation has a partnership interest as one of its assets, it is the underlying partnership's assets (to the extent of the corporation's interest therein) that are used in determining whether all or substantially all of the corporation's assets are used in an active business for the purpose of the definition of small business corporation under subsection 248(1) of the Act and for the purpose of the definition of QSBCS under subsection 110.6(1) of the Act. Provided that these assets are used principally in an active business carried on primarily in Canada by the partnership, they will qualify as being used by the partner in an active business carried on primarily in Canada by the corporation. As stated in Question 58 at the 1993 conference of the Canadian Tax Foundation, this position applies to limited partners as well as to general partners.

This administrative position applies where a corporation has an interest in the underlying partnership's assets. Where a partner holds a residual interest in a partnership, as described in section 98.1 of the Act, it would be necessary to determine whether that residual interest gives the partner an interest in particular assets of the partnership that are used in an active business carried on primarily in Canada. We are prepare to consider that a residual interest could be an asset used principally in an active business carried on primarily in Canada by the partner if the particular assets to which the residual interest relates are used principally in an active business carried on primarily in Canada by the partnership and if the right to those assets is the only right of the partner. In all other situations, our response would depend on the facts and the particular partnership agreement.

Where the partner is retired and receives an allocation of a share of the income or loss of the partnership, as described in subsection 96(1.1) of the Act, it is our view that the retired partner does not have an interest in the underlying partnership's assets and therefore, the position mentioned above would not apply.

Although subsection 96(1.1) of the Act will deem the corporation to be a member of the partnership for certain purposes, it does not deem the corporation to be carrying on the business of the partnership. Subsection 96(1.6) of the Act deems a taxpayer to carry on business in Canada for certain purposes of the Act but it does not apply to subsection 110.6(1). Furthermore, subsection 96(1.6) does not deem a member to be carrying on an active business. Therefore, the corporation would not earn income from an active business carried on by it and the right to a share of income or loss of the partnership, as described in subsection 96(1.1) of the Act, would not qualify as an asset used principally in active business carried on primarily in Canada by the corporation.

In our view, the share of a Canadian-controlled private corporation would not be a "QSBCS" within the meaning of subsection 110.6(1) of the Act in the situation where the corporation's only asset is a right to an allocation of a share of the income or loss of the partnership, as described in subsection 96(1.1) of the Act.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

Marc Vanasse
Acting Section Chief
Resources, Partnerships and Trusts Section
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch