10 November 1989 Income Tax Severed Letter AC57948 - Section 19(1)

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.

5-7948
                                                  R.B. Day
                                                  (613) 957-2136

19(1)

We are replying to your letter of April 19, 1989, wherein you requested our views regarding the application of section 54.2 and subsection 110.6(2.1) of the Income Tax Act (the "Act") in the following hypothetical situation.

I. LP is a limited partnership that is registered as such under the laws of the relevant provincial jurisdiction.

2. LP is a "Canadian partnership" (within the meaning assigned by paragraph 102(a) of the Act).

3. All or substantially all of the assets of LP sre used in an "active business" (with the meaning assigned by subsection 248(1) of the Act) carried on primarily in Canada.

LP subsequently transfers all of its assets to a corporation incorporated in Canada, utilizing the provisions contained in subsection 85(2) of the Act to effect the transfer on a tax deferred basis.

5. Within days of the above-noted transfer, LP sells its shares of the corporation to an arm's length purchaser. The sale occurs after June 17, 1987. It is conceded that the assets were transferred in contemplation of the sale of shares.

6. The corporation at all relevant times is a "small business corporation" (with the meaning assigned by subsection 248(1) of the act).

Our Comments

We will respond to your questions in the order in which they appear in your letter.

1.   (a)  It is our opinion that section 54.2 of the Act does not
          deem the shares to be capital property of the LP
          because the LP is not a person under the Act. 
          Paragraph 1 of  IT-90
 states, in part, that "a
          partnership is not a person nor is it deemed to be
          within the meaning of the Act, notwithstanding that
          section 96 provides that the income of a member of a
          partnership is computed as if the partnership were a
          separate person resident in Canada."

     (b)  The issue of whether a particular transaction is on
          income or capital account will depend on all the
          circumstances of each case.  It is our view that
          without section 54.2 of the act, the sale of assets to
          a corporation by a person followed shortly thereafter
          by a sale of the shares by that person could very well
          be an "adventure in the nature of trade." The profit
          derived therefrom, could be taxed as ordinary income of
          that person.

     (c)  Since a partnership is by definition "... the relation
          that subsists between persons carrying on business in
          common with a view to profit" (paragraph 2 of  IT-90
)
          it is our view that the sale of assets to a corporation
          by the LP followed shortly thereafter by a sale of the
          capital shares by the LP could also be an adventure in
          the nature of trade.  The income derived by the LP from
          the disposition of shares could be business income of
          the LP and allocated to the individual partners under
          paragraph 96(1)(f) of the Act.

2. In the event that the transaction by the LP described in 1(b) resulted in a taxable capital gain on the disposition of qualified small business corporation shares (as defined in subsection 110.6(1) of the Act) it is our opinion that each individual partner would be eligible to claim the enhanced capital gains deduction under subsection 110.6(2.1) of the Act subject to the provisions of subsection 110.6(11) of the Act.

We hope these comments prove helpful.

Yours truly,

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