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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] Can a partnership or corporation actively engage on a regular, continuous and substantial basis in the business activities of a partnership throughout the year?
Position: Question of fact. In the first situation, this is possible because of the activities of the partner subject to the partnership agreements involved. In the second situation, we are of the view that it would be possible to take into account the degree of involvement among other things, of directors and employees of the corporation to verify whether the latter actively engages in the partnership’s business.
Reasons: The Income Tax Act.
XXXXXXXXXX 2010-037534
Anne Dagenais
Advocate, M. Fisc. B.A.A
March 21, 2011
Dear Madam,
Subject: Specified member
This is in response to your letter of July 19, in which you requested our opinion on the above subject. That request is in addition to your request of September 10, 2009 to which we responded. That first request was numbered 2009-034208.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
As part of your current request, you are seeking our comments with respect to two scenarios. The first concerns two partnerships, SENC-V and SENC-SV. More specifically, Mr. S and SENC-V hold interests in SENC-SV of 90% and 10%, respectively. The two partners are liable in case of lawsuits by third parties. Mr. W and Mr. V hold partnership interests in SENC-V of 1% and 99%, respectively and are not related persons for Canadian tax purposes. All the management of the SENC-V is conducted by Mr. V. The time devoted by Mr. V to his activities at the level of the SENC-V is quite comparable to a full-time job but is, however, not remunerated. As for Mr. W, he contributed only to the financing of SENC-V.
The second scenario instead concerns SENC-AB. Mr. A and a corporation hold partnership interests in SENC-AB of 90% and 10%, respectively. All the shares of the capital stock of the corporation are held by Mr. B. The two partners are liable in case of lawsuits by third parties.
For the purposes of the definition of specified member and subsection 40(3.1), you wish to know if, in the first scenario, SENC-V is actively engaged in the business of SENC-SV given that Mr. V was actively engaged in the activities of SENC-SV. Similarly, you wish to know if, in the second situation, the corporation is actively engaged in the activities of the business of SENC-AB given that Mr. B takes care of all of the management of SENC-AB.
For the purposes hereof, we have assumed that SENC-V, SENC-SV and SENC-AB are partnerships under the laws of the Province of Quebec.
Our Comments
It appears to us that the situation described in your letter and summarized above could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we are able to offer the following general comments that may be helpful to you.
Subsection 40(3.1) provides for the application of certain rules applicable to limited partners and specified members of a partnership, in particular, where the adjusted cost base of such partners' interest in the partnership is negative at the end of a fiscal period of the partnership.
Subsection 248(1) defines "specified member" as follows:
specified member of a partnership in a fiscal period or taxation year of the partnership, as the case may be, means
[...]
(b) any member of the partnership, other than a member who is
(i) actively engaged in those activities of the partnership business that are other than the financing of the partnership business,
[...]
on a regular, continuous and substantial basis throughout that part of the period or year during which the business of the partnership is ordinarily carried on and during which the member is a member of the partnership; …
Generally, we are of the view that a person is actively engaged in a business where that person is directly involved in the management and /or day-to-day activities of the business. Typically, that person devotes time, work and energy to the business. The concept of "engages actively in the business of the partnership" is a concept that can be verified quite well where the partner is an individual.
Consequently, a partner must actively engage in the activities of the partnership's business (except fundraising activities) on a regular, continuous and substantial basis throughout the year, failing which the partner will be a "specified member" of the partnership. Of course, the question of whether a partner is a "specified member" of a partnership is a question of fact and must be determined by reference to the particulars and all the facts of a situation.
For the purposes of the Act, a partnership does not exist as an entity in itself, distinct from its partners. Consequently, in determining whether a partnership (where that partnership exists), which is itself a partner of another partnership, is actively engaged in the activities of that other partnership, we are of the view that it is possible to take into account the degree of involvement of the partner in the activities of the partnership subject, inter alia, to the partnership agreements involved.
In this case, we are of the view that, subject inter alia to the partnership agreements involved, the more Mr. V is involved in the management and/or day-to-day business of SENC-SV, the less likely it will be that SENC -V will be considered a specified member within the meaning of subsection 248(1).
Regarding the second situation for which you wish our comments, where the partner is a corporation, the concept of "actively engaging in the partnership business" seems to become much more abstract. At first glance, we are not persuaded that it is readily apparent that a corporation that is a member of a partnership may be actively involved in the business activities of a partnership on a regular, continuous and substantial basis throughout the partnership's fiscal periods. On the other hand, we are of the view that it would be possible to take into account the degree of involvement, among others, of the directors and employees of the corporation to verify whether the corporation actively engages in the partnership’s business.
These comments do not constitute an advance income tax ruling and are not binding on the CRA with respect to a particular factual situation.
We hope that the above comments will be of assistance and will answer your questions.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.
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