Section 96

CRA ruled that a société civile de placement immobilier (“SCPI”) [real estate investment company] was a corporation for ITA purposes and a “company” for purposes of the Canadian application of the Convention with France. Although its members were styled as partners who could be liable for debts of the partnership up to the amount of their subscribed capital and its income was allocated to them for French income tax purposes, their interests were measured by shares, and under French law, an SCPI has legal personality, has the capacity to enter into contracts with third parties, has its own assets and is liable for the debts it may incur.

Before finding that a Burkina Faso limited liability company (S.A.R.L.) should be classified as a corporation for ITA purposes, CRA stated that, like a Canadian corporation, the SARL “has legal personality separate from that of its members; it owns its own property; it has its own obligations; and the liability of its members is limited since they are liable for the SARL’s corporate debts only up to the amount of their contributions.” It also has partnership features, e.g., a provision in the governing Act providing that a SARL “is created by (one or more) persons that agree, through an agreement, to contribute, to an activity, cash, or in-kind or services assets for the purpose of sharing profits or enjoying revenues that may derive therefrom” – but, overall, its attributes were closer to those of a Canadian corporation than of a partnership.

Canco2, a Canadian subsidiary of a Canadian publicly traded company (Canco1), was the limited partner of two “sociétés en commandite simple” (the SCSs) formed in Côte d’Ivoire and Gabon (the Ivory Coast SCS and Gabon SCS) and controlled foreign affiliates of Canco1 were the general partners. The Uniform Act on Commercial Companies and the Economic Interest Group which governed each SCS provided inter alia that:

• a company such as an SCS was created by two or more persons agreeing to contribute to an activityfor the purpose of sharing profits or enjoying revenues therefrom;
• each company had separate legal personality from the date of registration;
• securities conferred on their holders a right to profits whenever their distribution had been determined and to the net assets of the company on its dissolution or in connection with the reduction of its capital;
• in a limited liability partnership, “general partners,” who were jointly and severally liable for the company’s debts, coexisted with one or more “limited partners” who were liable for the company debts up to the amount of their contributions; and
• a limited liability partnership was managed by all general partners, unless the articles of association or a subsequent insturment provided for the appointment of one or more managers from among the general partners.

The Directorate stated:

Generally, corporations in Canada have the following characteristics, among others:

• Legal personality …
• Limited liability of shareholders and a corporation can incur losses for which the members are not liable;
• Issuance of share capital to shareholders;
• Distributions: shareholders of a company are entitled to the division and distribution of profits after they are declared by the corporation;
• Centralization of management;
• Free transferability of interests;
• Incorporation by statute or by the registration of memorandum of association.

Generally, to qualify as a partnership under Canadian provincial law, there are three essential elements:

• a business;
• carried on in common by two or more people;
• with a view to profit.

Before finding that the SCSs were partnerships for ITA purposes, the Directorate stated:

Given that Côte d’Ivoire and Gabon are civil law systems and that Quebec is the only province that has a civil law system in Canada, it is appropriate to primarily compare the SCS to partnerships formed under the Civil Code of Quebec.

… Under Article 2219 of the Civil Code of Quebec (“CCQ”) … a partnership can conclude contracts in its own name. Article 2225 … provides that a partnership may sue and be sued under the name it declares. Article 2199 of the CCQ essentially provides that partnerships have separate patrimonies from those of their partners. Even though a general or limited partnership formed under the CCQ does not have legal personality, it has a many of the characteristics typically associated with legal personality.

A comparison of the provisions of the CCQ and the Uniform Act shows that the provisions of the two sets of legislation are very similar, except that Québec partnerships are not legal persons but SCSs have legal personality. In our view, the unlimited liability of the general partners of an SCS is an important trait that favors partnership status under the Act since the sharing of responsibility for partnership debts is a primary trait of partnerships in Canada while the limited liability of shareholders is generally a primary trait of corporations in Canada. Although legal personality is also a primary trait of corporations in Canada, we have previously stated that the existence of a separate legal personality alone is generally not sufficient to distinguish certain foreign partnerships from Canadian partnerships.

When asked as to the entity classification of a Luxembourg limited partnership (société en commandite simple (SCS)) or special limited partnership (société en commandite spéciale (SCSp)), CRA (without wishing to respond definitively to this question) noted:

• The fact that a société en commandite simple has separate legal personality under the commercial law of Luxembourg is not determinative.
• CRA has viewed a société en commandite simple in France as a partnership, irrespective of whether it has irrevocably elected to be taxed as a corporation in France – and similarly, the recent enactment of reverse hybrid rules in Luxembourg would not be determinative.
• The Directorate will shortly be publishing an opinion that sociétés en commandite simple formed in Ivory Coast and Gabon most closely resembled a partnership under “Canadian law” notwithstanding their separate legal personality, given the unlimited liability of the general partner, as well as other characteristics.
• Because Gabon and Ivory Coast are civil law jurisdictions, it was considered appropriate to compare the characteristics of such entities to those of partnerships formed under the Civil Code of Quebec.

Regarding the “domestication” of an exempted Bermuda limited partnership to become a limited partnership governed by the Delaware Revised Uniform Limited Partnership Act (the “DRULPA”), CRA accepted a representation that the partnership activity (of holding shares of subsidiaries) was carried on in common with a view to a profit and that the partnership was considered a partnership for purposes of the Act prior to the domestication transaction, and ruled that following the domestication, the partnership will be treated as a partnership for purposes of the Act.

CRA indicated that whether a payment made by a limited partnership to a limited partner that was styled as a loan was to be treated as a loan for purposes of ss. 96(2.2)(c) and 53(2)(c)(v) (rather than as a distribution) was to be determined based on the laws of Ontario.

Regarding the common law, the Directorate stated (adverting to the Rye v. Rye/ Klein line of cases):

It is well established at common law that a man cannot contract with himself and that a partner cannot contract with a partnership of which he is a member. Therefore, it is necessary to determine whether a limited partnership can make a loan to a limited partner pursuant to statutory law, thereby overriding such long-standing common law rule.

CRA indicated that, under its two-step approach, a UK LLP is a corporation rather than a partnership given that:

• A UK LLP has a legal existence separate from its members.
• A UK LLP, and not its members, carry on the business.
• A UK LLP, and not its members, acquires and owns property in its own name for use in its business, and is responsible for any debts or obligations incurred as a result of carrying on its business.
• The capital of a UK LLP serves the same function as the share capital of a corporation.

Two Florida or Delaware LLLPs (held by Canadian resident corporations) that have filed as partnerships for Canadian tax purposes since the time of their formation are looking to be treated as corporations for Canadian tax purposes on a prospective basis.

After having noted that one of the conditions for its administrative practice of allowing any such entities formed before April 26, 2017 to file as a partnership was that “no member of the entity and/or the entity itself takes inconsistent positions from one taxation year to another … between partnership and corporate treatment,” CRA stated in response to a query dated June 29, 2018:

In our view, the change by the LLLPs from partnership to corporate treatment constitutes taking an inconsistent position from one taxation year to the next and accordingly, the first condition noted above would not be met.

As stated at IFA 2017, where any of these conditions is not met in respect of any such entities formed before April 26, 2017, the CRA may issue assessments or reassessments to the members and/or the entity, for one or more taxation years, on the basis that the entity was always a corporation.

The LLLPs will not be viewed as corporations for Canadian tax purposes on a solely prospective basis.

Foreign pension funds invested in particular securities’ portfolios including, in some cases, Canadian securities through acquiring “units” in particular sub-funds of a Luxembourg FCP (“fonds commun de placement,” which might literally be translated as an “investment mutual fund”). Their units were stated to give them a proportionate ownership interest in the sub-fund. The portfolios were managed by a manager and held by separate custodians.

CRA ruled that the FCP including the constituent sub-funds would be treated as fiscally transparent for purposes of the Act so that, for example, dividends or interest paid by a particular Canadian investment in a sub-fund would be considered an amount paid directly to the unitholder “in proportion to its co-ownership interest in the assets and Gross Income of the particular Sub-Fund.” This ruling letter essentially constitutes the reissuance of 2007-0231581R3.

The Directorate accepted the TSO view that an Icelandic “Sameignarfelag” was as a partnership, stating:

As indicated in Income Tax News No. 38, to determine the status of a foreign entity for Canadian tax purposes, the two-step approach is generally followed:

1. Determine the characteristics of the foreign business association under foreign commercial law;

2. Compare these characteristics with those of recognized categories of business associations under Canadian commercial law in order to classify the foreign business association under one of those categories.

Under Canadian law, the three essential ingredients to the formation of a valid partnership are: a business, carried on in common, and with a view to profit. In this case, you have informed us that you have accepted as fact that FORP qualifies as a partnership for purposes of the Act. In this regard, we note that in Advance Income Tax Ruling #2006-0187681R3, issued in 2007, the Rulings Directorate concluded that the Sameignarfelag discussed in that ruling would qualify as a partnership for purposes of the Act.

CRA essentially repeated the points made in the 21 July 2017 Email of the CRA Delaware/Florida Working Group respecting grandfathering of existing LLPs/LLLPs.

CRA also declined to rule that a specific French SLP (Société de Libre Partenariat) was a partnership for ITA purposes. CRA stated:

The entity was to be created as a French SLP – which is a “Fonds Professionnel Spécialisé” – established as a “société en commandite simple” (“SECS”). A SECS is considered to be a “société commerciale” under French law, as is also the case for a “société en nom collectif”, “société à responsabilité limitée” and a “société par actions”.

CRA noted the following salient characteristics of an SLP established as a SECS [usually translated as "limited partnership"]:

• the existence of a separate legal personality that is recognized under the law of the relevant foreign jurisdiction – meaning the entity’s full legal capacity to acquire and own property, to sue and be sued, to carry on its own activities and to incur liabilities of its own;
• the limitation of liability afforded to all of its “limited members”;
• the unlimited liability of the “general member”; and
• the computation of earnings at the entity level, with a distribution mechanism akin to the declaration and payment of a dividend.

CRA went on to state:

The existence of a separate legal personality alone is generally not sufficient to distinguish certain foreign partnerships from Canadian partnerships. However, in our view, the absence of legal authority to support an effective entitlement to share profits and losses earned through the entity along with the other corporate like characteristics noted above, were sufficiently important in this case to conclude that this entity should not be treated as a partnership for Canadian tax purposes.

Investors subscribe for units of “Subfunds” of an “Umbrella” fund, both situated in and governed by the laws of a redacted non-resident jurisdiction. The units are described both as a claim against the fund manager and as representing a co-ownership interest as tenant in common in the investment assets of a particular Subfund (with each Subtrust having a different investment focus as to the bonds or shares it invests in), which are managed by the non-resident fund manager on a discretionary basis and held by a non-resident custodian bank. CRA ruled that the funds were fiscally transparent, so that a non-resident pension fund holding units in a Subfund that, in turn, held Canadian equities, could rely on its exempt pension fund status for Part XIII tax purposes.

At the 2017 IFA Roundtable, CRA announced that it will allow Delaware & Florida LLPs and LLLPs formed before April 26, 2017 to continue filing as...

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An LP governed by provincial law and with Canadian-resident members, invested as a limited partner in two LLLPs governed (“Florida-LLLP-1” and “Florida-LLLP-2”) governed by the Florida Revised Uniform Limited Partnership Act of 2005 (“FRULPA”), which provided:

• An LLLP is an entity distinct from its Partners that has a perpetual duration.
• General Partners have limitation of liability in respect of the obligations of the LLLP.
• Each General Partner is an agent of the LLLP for the purposes of the LLLP’s activities, and a Limited Partner does not have the right or the power to act for or bind the LLLP.
• Profits and losses of an LLLP shall generally be allocated among the Partners on the basis of the value of their Contributions.
• It may be continued into another jurisdiction, converted into another type of listed entity, or merged with other such entities.

The Agreement for the Florida-LLLP-1 (and similarly for Florida-LLLP-2) provided:

• the LLLP is a separate and distinct legal entity, all business of which should be conducted in its name;
• all property owned by the LLLP shall be owned by it as an entity and Partners shall generally have no ownership interest in any of the LLLP’s property, their interest in the LLLP being a personal property for all purposes; and
• the details of the Partners’ Capital Contributions, and the rules to maintain each Partner’s Capital Account and for the yearly allocation of Profits or Losses to Partners and for the distributions.

The Florida-LLLPs owned and operated Florida real estate, but then were liquidated and dissolved, with the surrender of their property being reported in accordance with the s. 79 rules. The LP reported capital losses on land, and terminal losses on Class 1 and Class 8 assets. Assessments disallowed terminal losses and capital losses on the basis that the Florida-LLLPs were corporations.

The Directorate indicated that, consistently with 2016-0642051C6, a Florida LLLP generally should be considered as a corporation given “the existence of a separate legal personality that is recognized under the FRULPA – meaning the full legal capacity to acquire and own property, to sue and be sued, to carry on their own activities and to incur liabilities of their own – and the limitation of liability afforded to all of their members.” However, in light of the transitional relief being afforded to such partnerships, the Directorate suggested “that consideration be given to allowing the Florida-LLLPs to be treated as partnerships for the purposes of the Act for the relevant taxation years.”

Two related taxable Canadian corporations (CanGP and CanLP) were the general and limited partner, respectively, of a Limited Liability Limited Partnership (“Delaware-LLLP “) that had been constituted by filing a certificate with the Delaware Secretary of State. Under the Delaware Revised Uniform Limited Partnership Act (“DRULPA”):

• an LLLP is a separate legal entity that has a perpetual duration;
• Limited Partners (and subject to the Partnership Agreement) the General Partners;
• each General Partner is an agent of the LLLP for the purposes of the LLLP’s activities;
• profits and Losses of an LLLP shall generally be allocated among the Partners on the basis of the value of their contributions, subject to another method provided in the Partnership Agreement; and
• it may be continued into another jurisdiction, converted into another type of listed entity, or merged with other such entities.

The Partnership Agreement contained the agreement of CanGP and CanLP respecting the maintaining of capital accounts and sharing of profits and losses, stipulated CanGP’s exclusive management responsibility and authority and provided for a Board of Managers to provide overall guidance to CanGP, and specified the “Liquidating Events,” which did not include a predetermined date.

Delaware-LLLP disposed of all of its assets, used the proceeds received principally to terminate services contracts, and was subsequently dissolved, with CanGP and CanLP claiming capital losses. The Tax Services Office reassessed, with the reassessments being buttressed by a secondary position that Delaware-LLLP should be considered as a corporation.

The Directorate indicated that, consistently with 2016-0642051C6, a Delaware LLLP generally should be considered as a corporation given “the existence of a separate legal personality that is recognized under the DRULPA – meaning the full legal capacity to acquire and own property, to sue and be sued, to carry on their own activities and to incur liabilities of their own – and the limitation of liability afforded to all of its members.” However, in light of the transitional relief being afforded to Delaware LLLPs so that, in the taxation years involved, Delaware LLLPs would be considered as a “partnership for the purposes of the application of the Act to CanGP and CanLP’s XXXX…” it was suggested that the secondary position be dropped so as “to be consistent with the intended treatment of other taxpayer files being considered.”

Are there further developments on CRA’s policies respecting its view of Florida and Delaware LLPs and LLLPs as corporations? CRA indicated that any such entities formed before 26 April 2017 would be accepted as partnerships for all prior years as well as all future years, provided that none of the following applies::

• one or more members of the entity, or the entity itself, takes inconsistent positions from one taxation year to another, or for the same taxation year, as between partnership or corporate treatment;
• there is a significant change in the membership or the activities of the entity; or
• the entity is being used to facilitate abusive tax avoidance.

LLPs and LLLPs of other US jurisdictions have similar attributes to those entities, and therefore the CRA views them as corporations, will also be eligible for this administrative grandfathering. Any such grandfathered entities that choose to file as a corporation must do so for all taxation years.

Any such entities formed after 26 April 2017 will be treated as corporations.

Certain U.S.-based Florida and Delaware LLPs and LLLPs, with many partners, which carry on business in Canada, are unable to qualify for relief, from CRA’s position on such entities being corporations, by converting to LPs because, for business reasons, they cannot do so. Amending all previous years’ returns for all individual partners would be impractical. Would the CRA consider allowing these entities to file as a corporation on a go-forward basis while leaving its previous years’ partnership/partner filings unchanged?

CRA indicated that if taxpayers were unable to convert to a partnership in accordance with its previous announcements on this issue, it is open to prospective treatment as a corporation, with prior problems being allowed to stand. Submissions from taxpayers and their representatives are welcomed. CRA will review such submissions to see that there is no unwarranted benefit or undue tax advantage, including a review of the relevant tax attributes.

A taxpayer’s representative submitted that Delaware, New York and Florida LLCs of which the taxpayer was a member should be treated as partnerships because the taxpayer was a Quebec resident and the attributes of an LLC were similar to those of a partnership under the Civil Code.

CRA indicated that it was not convinced that an analysis of the Civil Code provisions pointed to this conclusion, but went on to state (TaxIntepretations translation):

[I]f it were determined that such a comparative analysis supported the conclusion that a US LLC must be considered as a partnership for the purpose of application of the Act, we suggest that it would not be appropriate to adopt a classification approach to entities and foreign arrangements which could result in a different classification according to the province or territory of the residence (or permanent establishment) of the taxpayer holding an interest in the entity or the arrangement. …

[I]t appears to us, based in particular on the conflict of law rules, that the provincial and territorial laws of property and civil rights in Canada provide for mutual recognition of different types of entities or arrangements established under the respective jurisdictions of the various provinces and territories, thus providing an expanded base for analysis that is uniform across Canada for the purposes of applying the two-step approach.

CRA briefly concluded (after referencing its two-step approach to foreign entity classification) that a Dutch Co-op was a corporation rather than a partnership for purposes of the Act. (See also 2010-0373801R3 and 2015-0571441R3.)

At 2016 IFA Roundtable, Q. 1, CRA indicated it had finalized its view that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes, but indicated that it was prepared as an administrative matter to continue accepting that an existing LLP or LLLP (that had been formed from scratch rather than being converted from an LLC) is a partnership if it is clear that the members are carrying on business in common with a view to profit, all members and the LLP or LLLP having been treating it as a partnership for ITA purpose, and the LLP or LLLP converts to a “true” partnership before 2018. This position was substantially repeated at the 2016 STEP Roundtable, but with a comment made following a statement of the above conditions that “where some but not all of those conditions are met, those cases may be dealt with on a facts and circumstance basis.”

In concluding that limited liability partnerships (“LLPs”) and limited liability limited partnerships (“LLLPs”) governed by the laws of Florida and Delaware were corporations, CRA referred to their “separate legal personality” and “the extensive limitation of liability afforded to all of their members,” and also stated:

[I]t has become widely accepted that U.S….LLCs…are properly viewed as corporations for the purposes of the Act, notwithstanding…Anson… . We see little substantive difference between LLPs, LLLPs and LLCs governed by the laws of the states of Florida and Delaware. …

We suspect that much of this reasoning may be applicable in respect of entities of other states of the U.S. and perhaps other foreign jurisdictions… .

Respecting transitional relief, CRA stated:

[W]e are prepared to accept that any such LLP or LLLP be treated as a partnership for the purposes of the Act, from its time of formation, where

• the entity is formed and begins to carry on business before July 2016;
• it is clear from the surrounding facts and circumstances that the members
  • are carrying on business in common with a view to profit; and
  • intended to establish an entity that would be treated for Canadian income tax purposes as a partnership and not a corporation;
• neither the entity itself nor any member of the entity has ever taken the position that the entity is anything other than a partnership for Canadian income tax purposes; and
• the entity converts, before 2018, to a form of entity that is generally recognized as a partnership for Canadian income tax purposes.

…[W]e will not generally accept partnership treatment for a Florida or Delaware entity that starts out as an LLC and then converts, under corporate continuance-like statutory provisions, to an LLP or LLLP where there is no significant substantive change to their legal context.

Does CRA still follows the "two-step" approach to entity classification, and what new entities are being considered?

After noting the "contradictory guidance" provided by the English definition of "corporation," which includes an "incorporated company," and the French version, which refers to a "legal person" ("personne morale"), CRA stated:

[A] two-step approach is still the most appropriate approach to be followed and, in particular, that one should not simply consider any entity that has legal personality to be a corporation. Thus, we stand by our previous positions whereby we determined that general partnerships and limited partnerships governed by the laws of Delaware are to be treated as partnerships for the purposes of the Act.

…[W]e are currently analyzing "limited liability limited partnerships" ("LLLPs") governed by the laws of the State of Florida. This analysis has also led us to consider the status of "limited liability partnerships" ("LLPs") governed by the laws of Florida. …

[T]these entities have many characteristics in common with "limited liability companies" ("LLCs") that exist in the U.S., which are generally considered to be corporations for the purposes of the Act, but that they also have many characteristics in common with the various forms of partnerships. ... A particular area of focus for us is the exact nature of the limitation of liability for the partners…[which] seems to go beyond the type of limitation of liability applicable to partnerships governed by the laws of the Canadian provinces.

…[P]artnerships governed by the laws of many states of the U.S. have legal personality, meaning that they own property in their own right and they have the right to sue and be sued in their own name. Under some states' laws, such partnerships can also be converted to LLCs and "regular" corporations without causing any change in the ownership of their assets. …Florida LLLPs and LLPs… also have these elements of legal personality.

To summarize, our main cause for concern with these LLLPs and LLPs is that they seem to have both legal personality and full, or at least very extensive, limited liability for all members… . [W]e wonder whether these two factors…should be considered to be so significant that these entities should be classified as corporations for Canadian tax purposes.

[W]e are inviting comments from the tax community… .

How would a U.S. limited liability limited partnership ("LLLP") be characterized, e.g., one where the governing law does not require there to be a general partner who is liable for the partnership debts? CRA referred to Backman and then referred to its two-step approach (see ITTN, No. 38), stating:

[T]o determine the status of an entity for Canadian tax purposes, we would:

1) Examine the characteristics of the foreign business association under foreign commercial law and any other relevant documents, such as the partnership agreement or other contracts; and

2) Compare these characteristics with those of recognized categories of business associations under Canadian commercial law in order to classify the foreign business association under one of those categories.

The CRA would consider the classification of an LLLP in the context of an advance income tax ruling. Taxpayers should include with their request a complete description of the characteristics of the LLLP, their analysis as to its proper classification, a copy of the legislation under which the LLLP is to be created, and any other relevant documents, such as the partnership agreement or other contracts. [See also 2012-0463021C6.]

An Irish common contractual fund, which gave the unitholders proportionate undivided co-ownership interests as tenants in common in the property of the funds (investments in shares of listed companies), would be respected as a co-ownership arrangement for purposes of the Act.

See detailed summary under s. 104(1).

Canco made a loan to a partnership (governed by the laws of a province) between two non-resident corporations with which Canco does not deal at arm's length. In order for CRA to be able to reassess Canco under s. 17(1) and (6) in respect of the loan, it was necessary for it to qualify under s. 152(4)(b)(iii) as a loan made by Canco to persons with whom it did not deal at arm's length, namely, the partners. In finding that this requirement was satisfied, so that the reassessment could be made, CRA stated (TaxInterpretations translation):

…Paragraph 96(1)(a)[‘s] … presumption that a partnership is a separate person … does not apply for the purposes of section 152. ...

Furthermore …., under civil and common law, a partnership … is simply the relationship that exists between persons or partners who carry on a business in common for profit. [Furthermore] under the … laws of XXXXXXXXXX and the jurisprudence, a partnership does not have the power to contract debts. We refer you to … Klein [which] stated:

…[T]he partnership itself does not have the capacity to be indebted. The debt of the partnership is owed by the partners … .

After describing the distribution of property by the distributing corporation (DC) to three transferee corporations (TC1, TC2 and TC3) under a reorganization that is ruled to qualify as a butterfly reorganization and which is later represented not to include an acquisition described in s. 55(3.1)(c) "which is not described herein," the ruling describes a co-ownership agreement that is entered into by TC1, TC2 and TC3:

The co-ownership agreement will indicate that: (i) the co-owners do not intend to create a partnership; (ii) no co-owners can act on behalf of another co-owner without obtaining prior consent from that co-owner; (iii) each co-owner has a well-defined separation of interests in and ownership of the properties subject to the co-ownership agreement; (iv) a co-owner cannot charge and/or grant security over the co-owned properties as a whole (i.e. the other co-owner's interest) as each co-owner only has the right to deal with its own interest in the co-owned properties; (v) profit and loss is calculated by each co-owner individually and there is no mechanism in the agreement that deals with the allocation of profit or loss; and (vi) the liability of the co-owners is limited to their own expenses.

The ruling letter summary states that provided the representation that there is no partnership is accurate, the entering into of this co-ownership agreement will not taint the butterfly.

Article 2186 of the CCQ defines a contract of partnership as "a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits.” The CCQ, contrary to other provinces, thus does not require that there be a carrying on of a business for the partnership to exist. Does CRA agree? CRA responded:

[S]ection 8.1 of the Interpretation Act provides for the use of the applicable provincial law (either the civil law in Quebec, or the common law elsewhere in Canada) to determine the legal relationships for the purposes of applying a federal law that includes private law aspects.

…[F]or a partnership to exist in Quebec, there is no need for the carrying on of a business. However, since the question of the existence of a partnership is a question of mixed fact and law, it will be necessary to consider all relevant facts and legal documents pertaining to a particular situation.

A general partnership (SENC), which was generating losses, paid an amount in the year to one of the three equal partners (an individual). The Directorate stated that, in accordance with ITTN No. 30, “any remuneration paid to a partner for work performed in the course of partnership business may properly be considered a distribution of income or a withdrawal of capital and is not deductible in computing a partnership's income,” and that here, the amount was a non-deductible capital withdrawal.

CRA noted that a residence held by a partnership could qualify as an "eligible dwelling" for home renovation tax credit purposes of the individual notwithstanding that it was partnership property.

The initial concern as to the status of an entity governed by the DRUPA comes from the fact that an entity governed by this legislation is a separate legal entity which is distinct from its partners unless, or to the extent, otherwise provided in a statement of partnership existence and in a partnership agreement. However, an entity governed by the DRUPA has additional characteristics that are similar to the characteristics of a Canadian partnership. ...[T]he attributes of an entity formed under the DRUPA in which its members carry on business in common with a view to profit (in our common law sense) more closely resemble those of a Canadian general partnership under our common law and, as such, an entity governed by the DRUPA would be treated as a partnership for Canadian income tax purposes.

If FP is formed under the Delaware Revised Uniform Partnership Act ("DRUPA"), it as been the long-standing position of...CRA...that a partnership formed under DRUPA is a partnership for Canadian income tax purposes.

In the context of whether a private foundation could have its registration revoked for carrying on business through a foreign partnership that was governed by the Delaware Revised Uniform Partnership Act (DRUPA), the Directorate confirmed its position that the foreign entity status of such an entity (or of an entity governed by the DRULPA) did not preclude it from being a partnership.

A farming partnership between a husband and wife transfers its business to a newly-incorporated corporation ("Opco") whose common shares are held by the husband and wife and which issued promissory notes and preferred shares in consideration for the acquired business. Later, the husband and wife transfer their partnership interests in the partnership to a Newco for consideration that includes a note with a principal amount that is in excess of the adjusted cost base of the transferred partnership interest by $500,000 each, and receives redeemable retractable preferred shares for the balance of the consideration.

Respecting whether s. 84.1 would apply to the transfer of the partnership interests, the Agency questioned the validity of the partnership following the transfer of its business to Opco and also indicated that the application of s. 245 to the series of transactions would be considered.

After finding that s. 18(12) would apply to the joint owners (Messrs. A and B) of an inn whose wives operate it, with Messrs. A and B staying with them on weekends, CRA then considered whether s. 18(12) be avoided if Mr. A and Mr. B formed a partnership, leased the inn to the partnership, which would operate the business, so that the inn would now be a source of property income, not business income. Before referring to the potential applicability of GAAR, CRA stated:

[I]t is necessary to ensure that the transaction between a partner and the partner’s partnership (in this case, the rental of the building) is not simply a way of changing the nature of income that would otherwise be allocated to the partner by the partner’s partnership as business income. In other words, in order for the partnership to deduct an amount paid to a partner, the services must be provided by the partner in the course of a business separate from that of the partnership. In addition … it may be possible … to apply subsection 18(12) to a business loss allocated to a partner by the partnership.

Where a loan was made to the limited partnership that qualified as a security for purposes of s. 108(2)(b)(v), CCRA would both require that the loan not represent in excess of 10% of the property of the trust (on the basis that under s. 12(1) of the Limited Partnerships Act (Ontario), a limited partnership may for specified purposes be a debtor of a limited partner) and that, on a look through basis, not more than 10% of the trust's property would consist of bonds, securities or shares of any one corporation or debtor. CCRA stated:

The Directorate concluded that a Fonds Commun de Placement à Risques (a venture capital mutual fund) constituted a co-ownership arrangement rather than a partnership or trust for ITA purposes, although depending on the terms of the regulations adopted by the custodian and the management company of the fund, this conclusion could be altered. Such a fund was not a corporation since it lacked legal personality.

Three individuals wound up their partnership under s. 98(3) and transferred their undivided interests in the property to a new partnership among themselves and a fourth new partner. Regarding whether there had been a termination of the business for purposes of s. 34.1(8), CCRA indicated that s. 34.1(1) applied at the partner level and not at the partnership level and that there were arguments that the partners were carrying on the same business both before and afterwards, so that s. 34.1(8) should not apply and so that the partners would be required to estimate their income from the new partnership in accordance with s. 34.1(1). However, assuming that the old partnership was not wound up for tax avoidance reasons, CCRA was prepared to instead accept arguments that ss. 34.1(1) and (8) should be interpreted in light of s. 249.1(1), which contemplates the carrying on of a business at the partnership level – so that the business would cease to exist at the time the partnership ceased to exist, with the result that s. 34.1(8) would render s. 34.1(1) inapplicable.

Description of various clauses that establish that an agreement was a partnership agreement.

Entities that have been set out for non-profit purposes under the Delaware Revised Uniform Partnership Act would not satisfy the common law requirement of carrying on business with a view to profit and, therefore, would not be considered as partnerships for Canadian income tax purposes.

"The attributes of an entity formed under the [Delaware Revised Uniform Partnership Act] more closely resemble those of a Canadian general partnership under our common law and, as such, an entity governed by the DRUPA would be treated as a partnership for Canadian income tax purposes. Furthermore, it is our view that the existence of a separate legal entity clause contained in foreign partnership legislation would not, in and by itself, preclude an arrangement from being considered as a partnership for purposes of the Canadian Income Tax Act."

RC would appear to accept that a partnership that had filed for many years as a partnership and that held some units of another partnership (in addition to shares) should be accepted as being a partnership for purposes of the Act.

A German offene Handelsgesellschaft ("OHG"), as described by the writer, would be considered a partnership for Canadian tax purposes.

Before discussing the case law in the context of a dispute, RC stated that "in general, an acceptable partnership requires an investment by each partner, a written partnership agreement and proper notices to creditors and financial institutions concerning the existence of a partnership".

A société en nom collectif formed under the laws of France will be a partnership for purposes of the Act even though it has elected to be taxed as a corporation under French income tax law.