Principal Issues: [TaxInterpretations translation] Can a trust take an active part in the business of a partnership on a regular, continuous and significant basis throughout the year?
Position: Question of fact, in this case it's possible because of the activities of the trustee.
Reasons: Wording of subsection 104(1)
XXXXXXXXXX 2009-034208
Anne Dagenais
June 9, 2010
Dear Sir,
Subject: Specified Partner
This is in response to the September 10, 2009 email we received from XXXXXXXXXX in which XXXXXXXXXX asked for our views on the above subject.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
In particular, we examined a situation where a general partnership ("SENC") carries on a business. Trust Y and Trust X hold a 90% and 10% interest in the SENC, respectively, and are not related for Canadian tax purposes. Both partners are liable in the event of third party lawsuits.
The sole trustee of Trust X is Mr. X and the sole beneficiary of Trust X is a family trust of which Mr. X and his family members are beneficiaries. All management of the SENC is carried out by Mr. X. The time devoted by Mr. X to his activities for the SENC is largely comparable to a full-time job but is unremunerated.
As for Mr. Y, who is trustee of Trust Y, he only contributed to the financing of the SENC.
For purposes of the definition of "specified member" and subsection 40(3.1), you wish to know whether Trust X is actively engaged in the business of the SENC because its sole trustee has been actively engaged in the business of the SENC.
Our Comments
It appears to us that the situation described in your letter and summarized above could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
Subsection 40(3.1) provides for the application of certain rules applicable to limited and specified members of a partnership, including where the adjusted cost base of those members' partnership interests in the partnership is negative at the end of the fiscal period of the partnership.
Subsection 248(1) defines "specified member" as follows:
specified member of a partnership in a fiscal period or taxation year of the partnership, as the case may be, means
[...]
(b) any member of the partnership, other than a member who is
(i) actively engaged in those activities of the partnership business that are other than the financing of the partnership business…
[...]
on a regular, continuous and substantial basis throughout that part of the period or year during which the business of the partnership is ordinarily carried on… .
Consequently, a partner must be actively engaged in the business of the partnership (other than financing activities) on a regular, continuous and substantial basis throughout the year, or the partner will be a "specified member" of the partnership of which the partner is a member. Whether a member is a "specified member" of a partnership is a question of fact to be determined on the basis of the particulars of the member and all the facts of a situation.
Generally, we are of the view that a person takes an active part in a business where that person is directly involved in the management and/or day-to-day operations of the business. Generally, this person devotes time, work, and energy to the business.
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.
In this case, we are of the view that the 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).
These comments do not constitute an advance income tax ruling and are not binding on the CRA in respect of any particular factual situation.
We hope that the above comments are of assistance and answer your questions.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.