Principal Issues: Whether, in conformity with subsections 39(4.1) and 39(5), a limited partner in a limited partnership investing in highly speculative investments can elect under subsection 39(4) in order to obtain a capital gain treatment on the income allocated to the limited partner and resulting from the disposition of Canadian securities owned by the limited partnership.
Position: Question of facts. The limited partner will be considered to carry on the business of the limited partnership for the purpose of subsections 39(4) and 39(5). It is a question of fact whether the limited partner is a taxpayer described in subsection 39(5).
Reasons: Subsection 39(4.1) overrides the presumption under subsection 96(1)(c) that the limited partnership is a separate person resident in Canada. Under subsection 39(4.1), the limited partners are deemed to own and dispose of the Canadian securities owned by the limited partnership for the purpose of applying subsections 39(4) and 39(5).
XXXXXXXXXX 2014-055996
G. Gladu, M.Fisc
(819) 639-3271
June 20, 2016
Dear Sir,
Subject: Election respecting disposition of Canadian securities under subsection 39(4) of the Income Tax Act
This is in response to your letter of November 27, 2014 in which you requested clarification on the application of the election for the disposition of Canadian securities under subsection 39(4) of the Income Tax Act (hereinafter the "Act") to a limited partner of a limited partnership (the "LP") in connection with a given situation. We apologize for the delay in responding.
Unless otherwise stated, all statutory references herein are references to the provisions of the Act.
1) The given situation
The given situation concerns a limited partner of an LP generally described as a hedge fund (fonds de couverture) and intended for "accredited investors" satisfying certain personal financial criteria set by provincial financial authorities. Some of these funds specify in particular that they are not qualified investments for registered plans (RRSPs, RRIFs etc.) and can in some cases adopt investment strategies considered to be higher risk.
2) Your question
You requested our views on whether, to the extent that such an LP fund invests the majority of its assets in highly speculative securities, passive members of LP (the "limited partners") could still make elections under subsection 39(4) in respect of Canadian securities traded by the LP, in accordance with subsections 39(4.1) and 39(5).
3) Our comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Under subsection 39(4), and except as provided in subsection 39(5), where a Canadian security has been disposed of by a taxpayer in a taxation year and the taxpayer so elects in prescribed form in the taxpayer’s return of income under this Part for that year:
a) every Canadian security owned by the taxpayer in that year or any subsequent taxation year shall be deemed to have been a capital property owned by the taxpayer in those years; and
b) every disposition by the taxpayer of any such Canadian security shall be deemed to be a disposition by the taxpayer of a capital property.
Subsection 39(5) provides that an election under subsection 39(4) does not apply to a disposition of a Canadian security by a taxpayer (other than a mutual fund corporation or a mutual fund trust) who, at the time of disposition, is a trader or dealer in securities, a financial institution (as defined in subsection 142.2(1)), a corporation whose principal business is the lending of money or the purchasing of debt obligations or a combination thereof, or a non-resident, or any combination thereof.
For the purpose of determining the income of a member of a partnership, subsection 39(4.1) provides that subsections 39(4) and 39(5) apply as if every Canadian security owned by a partnership were owned by the taxpayer, and as if every Canadian security disposed of by the partnership in a fiscal period of the partnership were disposed of by the taxpayer at the end of that fiscal period.
We are of the view that a limited partner of an LP will be considered to be carrying on the business of the LP in applying subsections 39(4) and 39(5). The determination of whether a partner is a taxpayer described in subsection 39(5) is a question of fact to be made through a consideration of all the facts and circumstances of a particular situation. For your information, we refer you to paragraph 11 of Interpretation Bulletin IT-479R, Transactions in Securities (archived) that contains information that could be useful in determining, among other things, whether a limited partner of an LP in the described situation is a trader or dealer in securities for the purposes of subsection 39(5).
Furthermore, insofar as a limited partner of an LP is a non-resident, we believe that an election cannot be made under subsection 39(4) with respect to Canadian securities it owns, which includes the Canadian securities that the LP holds and which are deemed to be held by the non-resident limited partner under subsection 39(4.1).
We trust our comments will be of assistance, and please accept, Mr. XXXXXXXXXX, our best regards.
Stéphane Charette, CPA, CMA, MBA
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch