20 July 1989 Income Tax Severed Letter AC58035 - Definition of Small Business Corporation

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.

19(1)                                        M. Eisner
                                             613 957-2138

Dear Sirs:

This is in reply to your letter of May 4, 1989 concerning a corporation that owns an interest in a partnership in relation to the requirement in the definition of "small business corporation" in subsection 248(1) that all or substantially all of the fair market value of the assets be used in an active business.

With respect to your enquiry, you have outlined the following hypothetical situation:

(i) Mr. A enters into a partnership agreement with Mr. B in which the AB partnership provides services to arm's length third parties.

(ii) Mr. A transfers his partnership interest by way of a section 85 election to a newly incorporated holding corporation ("HOLDCO").

(iii) HOLDCO has no assets other than the partnership interest it has received from Mr. A.

For our general position on the above issue, we are referring you to paragraph 6 of Interpretation Bulletin IT-486R which states the following:

"Where a corporation has a partnership interest as one of its assets, it is the underlying partnership 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. Provided that these assets are used in an active business carried on primarily in Canada by the partnership, they will qualify." Accordingly, in the situation you have described, it is the corporation's proportionate share of the fair market value of the underlying assets of the partnership that is taken into consideration in determining if the previously mentioned requirement in the definition of "small business corporation" has been satisfied.

We trust you will find the foregoing satisfactory.

Yours truly,

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