Principal Issues: Whether a partnership is a "taxpayer" for the purposes of subsections 51(1), 85.1(1) and 86(1) of the Act.
Position: Yes. A "taxpayer" is defined in subsection 248(1) of the Act to include any person whether or not liable to pay tax. It is the CRA's practice, relying on the provisions of subsection 96(1) of the Act (and particularly paragraphs 96(1)(a) and (c)), to consider a partnership to be a person when the computation of income at the partnership level under Division B of Part I of the Act is involved. Subsections 51(1), 85.1(1) and 86(1) are generally relevant in the computation of the income of a taxpayer that "exchanges" property described in such provisions. Consequently, a partnership will generally be considered to be a person and a taxpayer for the purposes of subsections 51(1), 85.1(1) and 86(1).
Reasons: Wording of the Act and previous positions.
2005-015041
XXXXXXXXXX S. Prud'Homme
(613) 957-8975
December 16, 2005
Dear Sir,
Subject: Request for Technical Interpretation - Application of subsections 51(1), 85.1(1) and 86(1) to a partnership
This is in response to your fax of September 12, 2005, in which you requested our opinion regarding the potential application of subsections 51(1), 85.1(1) and 86(1) of the Income Tax Act (the "Act") in a situation involving a partnership, given that these legislative provisions refer to the concept of "taxpayer.
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
It appears to us that the situation described in your letter and hereinafter summarized could constitute an actual situation involving taxpayers. As stated in Information Circular 70-6R5, it is not the practice of this Directorate to issue a written opinion regarding proposed transactions otherwise than through advance rulings. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that we hope may be helpful to you. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all facts relating to a particular situation. Accordingly, and in light of the fact that your letter only very briefly describes a hypothetical particular situation, our comments below may not be fully applicable in a particular situation.
(1) Your Question
You wish to know whether the rules in subsection 51(1), 85.1(1) or 86(1) are available to a partnership in the context of a reorganization consisting of an "exchange" of an interest in the capital stock of a Canadian corporation, even though those legislative provisions refer to the concept of "taxpayer".
You also wish to know if the answer to that question is different to the extent that one of the members of the particular partnership is a non-resident of Canada.
(2) Your Comments
You are of the view that the rules in subsection 51(1), 85.1(1) or 86(1) are available to a partnership in the context of a reorganization consisting of an "exchange" of an interest in the capital stock of a Canadian corporation.
You are also of the view that a particular partnership can take advantage of those legislative provisions even if one of the members of that partnership is a non-resident of Canada.
In support of your position, you referred us, inter alia, to Technical Interpretation No. 56585 dated November 18, 1988 issued by our Directorate. In that document, the Canada Revenue Agency (the "CRA") states that it is of the view that a partnership qualifies as a "vendor" within the meaning of subsection 85.1(1). According to the CRA, such an interpretation is supported by paragraph 85.1(2)(c), which describes one of the circumstances in which subsection 85.1(1) does not apply, referring to an election under subsection 85(2) with respect to the exchanged shares. A subsection 85(2) election can only be made where a partnership has disposed of a property referred to in paragraph 85(2)(a). The CRA concludes that if Parliament's intention had been to not allow partnerships to avail themselves of the rules in subsection 85.1(1), a reference to the subsection 85(2) election in paragraph 85.1(2)(c) would not have been required.
In that regard, you noted that subsections 51(4) and 86(3) provide, inter alia, that subsections 51(1) and 86(1) do not apply where subsection 85(2) applies. Consequently, the reasoning described in Technical Interpretation No. 56585 would, in your view, also be applicable with respect to subsections 51(1) and 86(1) and the ability of a partnership to rely on those legislative provisions.
Furthermore, you pointed out that section 248(1) provides that taxpayers include all persons, even if they are not liable to pay tax.
(3) Our Comments
Paragraphs 96(1)(a) and (c) provide, inter alia, that where a taxpayer is a member of a partnership, the taxpayer's income, non-capital loss, net capital loss, restricted farm loss and farm loss for a taxation year, or taxable income earned in Canada for a taxation year, as the case may be, is computed as if the partnership were a separate person resident in Canada, and as if each partnership activity (including the ownership of property) were carried on by it as a separate person.
Furthermore, as you have pointed out, subsection 248(1) provides that taxpayers include all persons, even if they are not liable to pay tax.
Subsections 51(1), 85.1(1) and 86(1) are part of Division B of Part I of the Act and are relevant in determining the income of a taxpayer who "exchanges" property covered by those provisions. Based on the language of subsection 96(1), the CRA's practice is to treat a partnership as a person and a taxpayer when calculating income at the partnership level under Division B of Part I of the Act.
Based on the foregoing, it is our view that a partnership would generally be considered a "taxpayer" for the purposes of subsections 51(1), 85.1(1) and 86(1) and would therefore be entitled to rely on the rules contained therein, provided that the conditions set out in respect of those legislative provisions are satisfied. In our view, the fact that one of the members of the particular partnership is a non-resident of Canada would not change this.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, is not binding on the CRA with respect to any particular factual situation.
We hope that our comments will be of assistance and look forward to hearing from you.
Stéphane Prud'Homme, Notary, M.Fisc.
For the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Directorate General for Policy and Planning