22 October 1990 Ruling 901641 F - Capital Dividend Account and Eligible Capital Property

SUBJECT:  Capital Dividend Account and Eligible Capital Property File HAV 4533-3-4

This is in reply to your memorandum of July 23, 1990 regarding the computation of the capital dividend account (CDA) of a corporation where the corporation may be involved in more than one business and one of the businesses disposes of eligible capital property (ECP).

The facts are as follows:

24(1) The taxpayer bases his calculation on subclause 89(1)(b)(iii)(A)(III) of the Income Tax Act (Canada) (the "Act") wherein it states "1/2 of the aggregate of the eligible capital expenditures in respect of the business ..." and the taxpayer is of the opinion that each business must be calculated separately.

You would like to determine which calculation of the CDA is correct. At the same time, you are interested in knowing what our response would be if the businesses were carried out through joint ventures rather than partnerships.

The treatment of partnerships for purposes of the Act is described in Interpretation Bulletin IT-138R titled "Computation and Flow-through of Partnership Income". Paragraph 1 thereof states:

     "For the purposes of the Income Tax Act, a partnership is not a person and is not deemed to be a person. However, in determining a member's share of the income or loss of the partnership from a source or from sources in a particular place, the partnership first computes its income as if it were a person. A member's share of the income or loss of the partnership from each source then flows through to him pursuant to paragraph 96(1)(f) or (g), retaining its characteristics in respect of its source or nature."

Paragraph 19 of the same interpretation bulletin goes on to state:

     "For the purposes of paragraph 89(1)(b) it is considered that each of the items in subparagraphs 89(1)(b)(i), (ii), (iii) and (iv) is to be included in the corporate partners capital dividend account to the extent of its share thereof".

It is, therefore, our view that  24(1)

It is a question of fact whether or not a company is involved in more than one business. Without a review of all of the facts, we regret that we cannot comment on whether or not A Co is carrying on one business or three separate businesses. It would appear that the courts are more concerned with the nature of the business operations rather than the form in which the business is carried out. In the case of MNR v. Pevato 65 DTC 5183, which decision was confirmed without written reasons by the Supreme Court of Canada, Mr. Justice Gibson of the Exchequer Court, in determining whether there were two businesses, based his decision on the nature of the businesses rather than on whether there were two business undertakings. He found that a taxpayer who carried on a hotel business in partnership and who later carried on a motel business as the sole proprietor carried on the same business, that of providing accommodation for guests. In the case of Randall v. MNR 67 DTC 5151. Mr. Justice Hall of the Supreme Court of Canada found that both operations, one conducted through a corporation and the other conducted personally by an individual, were one and the same business.

In the situation where A Co enters into joint venture agreements with Corporation B and Corporation C rather than partnerships and it is determined that the company and the joint ventures are carrying on the same business then the CDA would be as calculated by the district office. Joint ventures, unlike partnerships, are not recognized separately for the purposes of the Act and as such, A Co's proportionate share of all transactions carried out by the joint venture would, for purposes of the Act, be considered to have been carried out by A Co.

We trust that the foregoing comments will be of assistance to you.

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