29 December 1989 Income Tax Severed Letter AC58399 - CCA Half-year Rule - Exception for Property Acquired In Non-arm's Length Transactions

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.

5-8399
19(1)                                   D. Turner
                                        (613) 957-2094

DEC 29 1989

Dear Sirs:

Re: Technical Interpretation of paragraphs 1100(2.2)(e), 1101(1ad)(b) and 1102(14)(b) of the Income Tax Regulations and the Draft Regulations

We are writing in reply to your letter of July 25, 1989 regarding the application of the above-noted Income Tax Regulations (the "Regulations") and Draft Regulations in certain hypothetical circumstances. In your letter you requested our opinion as to whether a Canadian partnership would be considered a "person" and a "taxpayer" for purposes of paragraph 1100(2.2)(e) of the Regulations and paragraphs 1101(1ad)(b) and 1102(14)(b) of the Draft Regulations. In addition, you requested our opinion of the relationship between "AB Partnership" and "Opco" in the following situations:

1)        Mr. A has a 75% interest (income and capital) in AB
          Partnership and owns 75% of the outstanding voting
          shares of Opco.

2)        Mr. A and Mr. B each has a 50% interest in AB
          Partnership and each own 50% of the outstanding voting
          shares of Opco. Mr. A and Mr. B are related.

3)        Mr. A and Mr. B each have a 50% interest in AB
          Partnership and each own 50% of the outstanding voting
          shares of Opco. Mr. A and Mr. B are not related.

4)        Mr. A and Mr. B each have a 50% interest in AB
          Partnership. Mrs. A and Mrs. B each own 50% of the
          outstanding voting shares of Opco. Mr. A and Mr. B are
          related (brothers).

5)        Mr. A and Mr. B each have a 50% interest in AB
          Partnership. Mrs. A and Mrs. B each own 50% of the
          outstanding voting shares of Opco. Mr. A and Mr. B are
          not related.

6)        Mr. A and Mr. B, who are related (brothers), each has a
          50% interest in AB Partnership. Mr. A owns 100% of the
          outstanding voting shares of Opco.

7)        Mr. A and Mr. B, who are related (brothers), each have
          a 30% interest in AB Partnership. The remaining 40%
          interest is owned by Mr. C, an unrelated individual.
          Mr. A and Mr. B each own 30% of the outstanding voting
          shares of Opco.  The remaining shares are held by
          unrelated persons.

In addition, you have requested our opinion as to whether in a situation similar to situation 7 (except that Mr. C owns 100% of Opco) our Department would apply the principles set out in Norco Developments Ltd. v The Queen (1985 CTC 130) and treat the transfer of 40% of the depreciable property to the corporation as a transfer "from a person (Mr. C) with whom the taxpayer (Opco) was not dealing at arm's length".

Our Comments

a) In our opinion, a partnership may be considered to be a person and a taxpayer for the purposes of paragraph 1100(2.2)(e) of the Regulations and paragraphs 1101(1ad)(b) and 1102(14)(b) of the Draft Regulations. As such, a non-arms length transfer of depreciable property between a partnership and another entity, would not fail to meet the requirements of the exempting provisions in those paragraphs solely on the basis that the transactions occurred between a partnership and another entity. This opinion is based on the wording in subsections 96(1) of the Income Tax Act (the "Act"), which requires a taxpayer who is a member of a partnership to compute his income as if the partnership were a separate person resident in Canada. As the definition of "taxpayer" in subsection 248(1) of the Act includes any person whether or not liable to pay tax, a member of a partnership would also compute his income as if the partnership were a taxpayer.

b) Whether a partnership and a corporation are dealing at arm's length with each other is a question of fact. Unlike therelationships between corporations and their shareholders, the relationships between partnerships and other entities are not specifically stated in the Act. When making a determination, it is necessary to consider not only the relationship between the partnership and the corporation, but also the relationships of the various individuals who control the partnership and the corporation. As such, our opinions related to the hypothetical situations which you have provided assume no unusual relationships exist between the parties involved and our opinions could differ in actual situations where all pertinent facts are known. Our opinions of the outlined hypothetical situations are as follows:

     1)   Generally, AB Partnership and Opco would not be
          considered to be dealing at arm's length as they are
          both controlled by the same individual.

     2)   Generally, AB Partnership and Opco would not be
          considered to be dealing at arm's length as they are
          both controlled by the same related parties.

     3)   Whether AB Partnership and Opco are dealing at arm's
          length would be dependent on the facts, however,
          generally the ownership interests given in the
          hypothetical situation would indicate that AB
          Partnership and Opco do not deal at arm's length.

     4)   Whether AB Partnership and Opco are dealing at arm's
          length would be a question of fact which could only be
          determined when all pertinent facts of a given
          situation were known. The nature of any transactions
          between the two entities would be of significant
          importance.

     5)   Generally, AB Partnership and Opco would not be
          considered to be dealing at arm's length however the
          nature of any transactions between the two entities
          would be of significant importance.

     6)   Generally, AB Partnership and Opco would not be
          considered to be dealing at arm's length as the owner
          of Opco is related to all members of the group which
          controls AB Partnership.

     7)   Again, the nature of the transactions between the
          entities would be of great importance in the
          determination as the ownership given in this situation
          would not necessarily lead to the conclusion that the
          entities are not dealing at arm's length.

c) The facts of the Norco Developments Ltd. court case differ from the hypothetical situation given, in the Norco case the court looked through the partnership to the partners involved, all of whom were associated. In your example, even if we were to look through the partnership, the two brothers with 60% interest are not related to either Mr. C or Opco. In our opinion, the Department would not generally consider treating 40% of a transferred asset in a manner that is different from the other 60% of the asset.

We trust that our comments will be of assistance.

for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch