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.
5-8451
C.R. Bowen
19(1) (613) 957-2096
January 22, 1990
Dear Sirs:
Re: Active Business Income
We are writing in reply to your letter of July 26, 1989, wherein you requested our interpretation concerning the "flow through " of active business income to a limited partner for the purposes of sections 125 and 95 of the Income Tax Act (the "Act"). We regret the delay in replying to your letter.
Your questions are as follows:
1. Corporation A is a limited partner in a limited
partnership ("LP"), which is carrying on an active
business. Does Corporation A's share of the income
allocated to it from the LP, represent active business
income to it? While paragraph 4 of Interpretation
Bulletin
IT-73R3
stated that "a share of income from an
active business of a partnership is considered to be
income of a corporate partner (whether a general or
limited partner) from the active business and thereby
qualifies for inclusion in the calculation described in
paragraph 125(1)(a),
IT-73R4
does not contain this
statement. Consequently, does the nature of the income
derived by a partnership flow through to all partners,
or must each partner be tested on the basis of that
partner's participation in the activities of the
partnership?2. If the level of participation of each partner is to be
taken into account in determining whether the income
allocated from the partnership to the partner is active
business income to that partner, does the legal
restriction on the activities of a limited partner
preclude that partner from having active business
income from the limited partnership?3. Do the responses to the above questions apply for the
purposes of both sections 125 and 95 of the Act?
Our Comments
A. Section 125-Small Business Deduction ("SBD")
1. Prior to amendments to the Act effective in 1979, the
term active business was not defined, and the
Department's position that you refer to in
IT-73R3
reflected the outcome of various court cases dealing
with that subject. However, effective for taxation
years commencing after 1978, the following definitions
were added to the Act: 1) "active business" paragraph
125(6)(d) of the Act, 2) "income of the corporation for
the year from an active business" paragraph 125(6)(e)
of the Act, and 3) "active business" subsection 248(l)
of the Act. These definitions provided criteria to be
used in determining the types of income that should be
included or excluded from the concept of active income.
In addition, various definitions were added to section
125 of the Act to include in the calculation of income
eligible for the SBD a corporate partner's share of
income or loss from a partnership. Subsequently,
substantial revisions were made to section 125,
applicable to 1985 and subsequent taxation years,
including replacing the previous definitions with those
now found in paragraphs 125(7)(a) to (g) of the Act,
and "active business" in subsection 248(l) of the Act. Consequently,
IT-73R4
, which applies to 1985 and
subsequent taxation years, indicates in the first
sentence of paragraph 3 that the reader must refer to
paragraph 23 of that bulletin in order to determine the
active business income of a corporation that is a
member of a partnership. Paragraphs 23 and 24 discuss
the concept of "specified partnership income", as
defined in paragraph l25(7)(f) of the Act, included in
the calculation of income eligible for the SBD in
subparagraph 125(l)(a)(ii) of the Act, as well as
"specified partnership loss", as defined in paragraph
125(7)(g) of the Act, included in the SBD calculation
in subparagraph l25(l)(a)(iv) of the Act. The
definition of "active business" in subsection 248(l) of
the Act is applicable in determining the meaning of
those words as they appear in the phrase "from an
active business carried on in Canada by it as a member
of the partnership" in paragraphs l25(7)(f) and (g) of
the Act. The income or loss of a partnership from a particular
source is included in the income of each partner to the
extent of its share of such income or loss in
accordance with subsection 96(l) of the Act. It is our
opinion that all members of a partnership, whether
general or limited, are considered to be carrying on
the business of the partnership. Therefore, the part
of the sentence in paragraph 4 of
IT-73R3
that stated
"A share of income from an active business of a
partnership is considered to be income of a corporate
partner (whether a general or a limited partner) from
an active business" is still applicable. Consequently,
where a limited partnership is carrying on an active
business, all members of that partnership will have
income derived from an active business. However, in
order to determine the amount of such income that is
eligible for the SBD, the amount of specified
partnership income or loss must be calculated in
accordance with paragraphs 125(7)(f) and (g) of the
Act, subject to the restrictions of subsection l25(6),
(6.1), (6.2), and (6.3) of the Act.2. As indicated in 1 above, for the purpose of section 125
of the Act, the level of participation of each partner
is not taken into account in determining whether the
income from a partnership, allocated to the limited
partners, is active business income to the partners.
B. Section 95-Foreign Affiliates
1. For the purpose of section 95 of the Act, all members
of a partnership are considered to be carrying on the
business of the partnership. Consequently, where a
limited partnership is carrying on an active business,
all members of that partnership will have income
derived from an active business. The concept of active
business used in section 95 as it relates to the
calculation of foreign accrual property income under
paragraph 95(l)(b) of the Act for the purpose of
section 91 of the Act is not defined. To the extent
they relate to the computation of active business
income, the definitions appearing in subsection 125(7)
of the Act referred to above, are only applicable to
businesses carried on by a taxpayer resident in Canada.
When interpreting the words "active business", the
comments in
IT-73R3
, including paragraph 4, will
generally be relevant with respect to the meaning of
income from an active business within the context of
paragraph 95(l)(b) of the Act. The concept of active
business is modified in subsection 95(2) of the Act to
include income that pertains to and is incident to an
active business that would otherwise not qualify and to
exclude certain types of service income that might
ordinarily qualify as active business income.2. As indicated in I above, for the purpose of section 95
of the Act, the level of participation of each partner
is not taken into account in determining whether the
income from a partnership, allocated to its limited
partners, is active business income to those partners.
We trust these comments will be of assistance. These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and is not binding on Revenue Canada, Taxation.
Yours truly,
for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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