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.
Principal Issues: Whether corporations in partnerships are carring on SIBs in varying scenarios
Position: No.
Reasons: Paragraph 20 IT-73R6.
XXXXXXXXXX 2009-033573
R. Ferrari
June 16, 2010
Dear XXXXXXXXXX :
Re: Specified Investment Business
This is in reply to your e-mail of August 7, 2009, regarding the definition of "specified investment business" ("SIB") in subsection 125(7) of the Income Tax Act (Act).
You have provided two scenarios in which Canadian controlled private corporations carry on a business in a partnership. You have asked for our views as to whether the businesses of these corporations are SIBs.
Scenario 1
Three associated corporations (Aco, Bco and Cco) own rental properties in a partnership arrangement and are in a business, the primary purpose of which is to earn rental income from property. The partnership employs more than 5 full-time employees that are actively involved in the management and operation of the partnership's rental business.
Scenario 2
The facts are the same as in scenario one, except that, Cco is not a partner of the partnership. Instead, Cco carries on an active business of providing property management services to the Aco and Bco partnership. Cco is associated with both Aco and Bco.
Our Comments
As explained in Information Circular 70-6R5, dated May 17, 2002, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of some assistance to you.
A SIB, defined in subsection 125(7) of the Act, generally means a business carried on by a particular corporation in a taxation year whose principal purpose is to derive income from property, such as rental income, unless the corporation meets one of two conditions:
(a) the corporation employs in the business throughout the year more than 5 full-time employees, or
(b) any other corporation associated with the corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the corporation in the year and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided;
The CRA's view with respect to a business carried on by corporations as members of a partnership for the purposes of paragraph 125(7)(a) are expressed in paragraph 20 of IT-73R6 "The Small Business Deduction", which reads as follows:
20. A business carried on by a corporation as a member of a partnership is not a "specified investment business" if the partnership employs more than five full-time employees. In other words, the corporation's share of income from the business can be included in the calculation of its "specified partnership income".
Therefore, in our view, the business carried on by Aco, Bco and Cco as members of the partnership as described in Scenario 1 will not be a SIB because the partnership employs in its business more than 5 full-time employees. Each corporate partner's share of the partnership's income would be included in its calculation of SPI for the purposes of computing its SBD for the year.
In the circumstances described in Scenario 2, Cco is associated with each of the partners of the partnership and it carries on an active business of providing property management services to the partnership. In such circumstances, the CRA would generally view that for the purposes of paragraph 125(7)(b), the business carried on by each of Aco and Bco as a member of the partnership would not be a SIB if the partnership could reasonably be expected to require more than 5 full-time employees if those services had not been provided by an associated corporation (Cco).
Our comments are based on the limited facts presented in this hypothetical scenario. Since these determinations always involve question of fact and law, we might have a different view once all the relevant facts in any given scenario are available. In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the CRA.
Yours truly,
G. Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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