Granby Togs Ltd. v. M.N.R., 58 DTC 1082 (Ex. Ct.)
The Minister assessed the taxpayer for excess profits tax on the basis that it carried on a business formerly operated by a partnership, and that the individual who held virtually all the shares of the taxpayer ("Zavalkoff") and who along with two other family members, had been an equal partner of the partnership, had a "substantial interest" in both the taxpayer and the partnership.
Before dismissing the appeal of the taxpayer, Fournier, J. quoted with approval of passage from Palser v. Grinling  1 All ER 1 (HL) at 11, including a statement that "one of the primary meanings of the word ["substantial'] is equivalent to considerable, solid, or big" and then stated (at p. 1084):
"In the present case, wherein three persons (the father and two sons) are the only partners in the partnership, all three having an equal interest and taking an equal part in the operations of the business of the partnership, in my opinion, each partner may be said to have a considerable and solid interest in the business; in other words, a substantial interest though they do not have a majority or controlling interest."
Lauger c. La Reine, 2008 DTC 3741, 2007 TCC 650 (Informal Procedure)
The performance by the first taxpayer of certain exercises on diskettes she was sent by a partnership in filling out a participation form in that regard was not enough to avoid her being a specified member of the partnership, and additional activities engaged in by the second taxpayer were performed by her in her capacity of employee of a corporation that was contracting with the partnership rather than in her capacity of partner. Accordingly, both taxpayers were specified members.
Brillon v. The Queen, 2008 DTC 3445, 2006 TCC 76 (Informal Procedure)
The taxpayers were specified members of a partnership. First, with respect to subparagraph (b)(i) of the definition, they were not "actively engaged" given the absence of a role in the partnership's decisions. Furthermore, even if they were active partners, they did not satisfy the "regular, continuous and substantial" test given that their only activity was to complete a questionnaire.
Rouleau c. La Reine, 2007 DTC 1619, 2007 TCC 338 (Informal Procedure)
In finding that the taxpayer was a specified member of a partnership that had been formed only for the purposes of flowing R & D deductions out to investors and which had no significant activity, Archambault J. noted (at para. 38):
"In my view, it is completely contrary to the intent of the Act to argue that one possible reason for Mr. Rouleau's lack of activity is the fact that the Cablotel partnership was engaged in only a small amount of activity. The reality is that in order to be excluded from the concept of passive specified member, one must show that one has been active, and, if there was no reason to be active, this would constitute a circumstance intended to be caught by the provision."
In the course of a general discussion of negative ACB issues for a partner or limited partner, CRA stated (TaxInterpretations translation):
[A] partner generally will be actively engaged in the activities of a partnership under the definition of "specified partner" in subparagraph (b)(i) of subsection 248(1) when directly involved in the day-to-day management and/or in the daily activities of the business of the partnership, other than financing, and dedicates time, work and energy in the pursuit of the business on a regular, continuous and substantial basis.
|Locations of other summaries
|Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.14) - Paragraph 40(3.14)(a)
|not a limited partner if unlimited liability to third parties
In the first scenario, Mr. S and SENC-V (a general partnership) hold interests in SENC-SV (another general partnership) of 90% and 10%, respectively. Two individuals hold partnership interests in SENC-V of 1% and 99%, respectively, with the second individual (Mr. V) devoting himself on essentially a full-time basis to managing SENC-V.
In the second scenario, Mr. A and a corporation held by Mr. B hold partnership interests in SENC-AB of 90% and 10%, respectively.
In the first (or second) scenario, is SENC-V (or the corporation) actively engaged in the business of SENC-SV (or SENC-AB) given that Mr. V is actively engaged in the activities of SENC-SV (and Mr. B takes care of all of the management of SENC-AB)?
[I]n 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 … 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.
… [S]ubject 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 … .
Regarding the second situation … [a]t 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 … 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.
The sole trustee of Trust X is Mr. X, who conducts all the management of the business of a general partnership (“SENC”) of which Trust X is a 10% partner. Is Trust X considered to be actively engaged in the business of the SENC because its sole trustee has been actively engaged in the business of the SENC? CRA responded:
Subsection 104(1) provides, inter alia, that, unless the context otherwise requires, a reference in the Act to a trust includes a reference to the trustee who controls the trust property. Consequently, in determining whether a trust, which is a member of a partnership, is actively involved in the partnership's activities, we are of the view that the degree of involvement of the trustee in the partnership's activities can be taken into account.
… [T]he more Mr. X is involved in the management and/or day-to-day operations of the SENC, the less likely it is that Trust X will be considered a specified member within the meaning of subsection 248(1).
|Locations of other summaries
|Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1)
|s. 104(1) imputes the activities of the trustee to the trust for “specified member” purposes
Regarding whether two minor children of the taxpayer were not “specified members” of a partnership between them, so that s. 96(1.8) would apply to income of the partnership, CCRA stated:
A specified member is inter alia a member who is not actively engaged in the business of the partnership. To be considered actively engaged in a partnership's business, a partner must normally devote sufficient time, work and attention to the partnership's business that such member’s contributions are instrumental to the success of the business.
A partner's participation in a management committee that sets budgets and makes decisions on an exception basis only (e.g.,where the decision in question exceeds the managing partner's operating authority) would not be considered, by virtue only of such activities, to be actively engaged in the partnership business.
1995 International Fiscal Association Conference, Q. 8 (C.T.O. "6363-1 Foreign Affiliate - Specified Member of Partnership")
"A person is actively engaged in the business of a partnership for the purposes of the definition of 'specified member' in subsection 248(1) of the Act, where that person is directly involved in the management and/or the daily activities of the business and where that involvement takes place on a regular, continuous and substantial basis throughout the period under consideration... . As a general rule, employees of the member affiliate must devote time and effort to the partnership business in addition to the capital contribution made by the member and the member's share in the income of the partnership would therefore normally not be determined solely on the basis of its capital contribution"
Re criteria for determining whether a partner is a specified member.
1992 A.P.F.F. Annual Conference, Q. 17 (January - February 1993 Access Letter, p. 56)
Partners whose only involvement in the partnership business is to answer surveys and to meet from time to time with persons in charge of the SR&ED projects being undertaken by the partnership in order to be informed and to have decisions and budgets approved, would not be considered to be specified members. A person is actively engaged in a business when that person is directly involved in the management and/or day-to-day activities of the business period.