24(1)
5-902603
H. Woolley
(613) 957-2139
19(1)November 22, 1990
Dear Sirs:
We are replying to your letter of September 29, 1990 wherein you requested our views regarding the application of subsection 110.6(2.1) of the Income Tax Act (the "Act") to the series of transactions described below.
Fact
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Proposed transactions
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The situation outlined in your letter appears to relate to specific proposed transactions with identifiable taxpayers. Confirmation of the tax consequences relating to specific proposed transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 70-6R2 dated September 28, 1990. We can, however, offer the following general comments.
A) Qualified Small Business Corporation Shares
In order for the capital gains deduction contained in subsection 110.6(2.1) to apply, there must be a disposition by an individual (as defined in subsection 248(1) of the Act) of a "qualified small business corporation share" (as defined in subsection 110.6(1) of the Act). Whether a share will be a "qualified small business corporation share" as defined in subsection 110.6(1) of the Act is a question of fact to be determined based on the various factual tests set-out in that provision being met at the determination time referred to in the provision and for the period described therein.
The deeming provision in paragraph 110.6(14)(f) was enacted to ensure that the holding period requirement contained in paragraph (b) of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Act cannot be circumvented through the issue of shares from treasury. As provided for in subparagraph 110.6(14)(f)(ii) of the Act the deeming provision does not apply in respect of shares that were issued as consideration for property of a partnership which consists of "all or substantially all of the assets used in an active business carried on by ... the members of that partnership".
Provided that a partnership is carrying on an active business, it is Revenue Canada's general view that the limited partners thereof would generally be regarded as carrying on an active business for the purposes of the Act.
B) Sale of Shares by a Limited Partnership
Whether or not a sale of shares by a partnership results in a capital gain is a question of fact. The issue of whether a particular transaction is on income or capital account will depend on the circumstances of each case. It is our view however, that although section 54.2 does not specifically make reference to dispositions by partnerships, the section will, by virtue of paragraph 96(1)(a) of the Act, apply to a disposition by a partnership.
In the event that a share sale by a limited partnership resulted in a taxable capital gain on the disposition of qualified small business corporation shares, it is our opinion that each individual partner who is resident in Canada would be eligible to claim the enhanced capital gains deduction under subsection 110.6(2.1) of the Act subject to the provisions of subsection 110.6(11) of the Act.
C) Winding-up of the Limited Partnership
Revenue Canada's practice with respect to subsection 85(3) of the Act is outlined in Interpretation Bulletin IT-378R . Subsection 85(3) applies where a partnership has disposed of property to a corporation under subsection 85(2), winds up its affairs within 60 days of that disposition and has, immediately before the winding-up, no property other than money or property received from the corporation as consideration for the disposition.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of Information Circular IC-70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly is not binding on Revenue Canada, Taxation.
Yours truly,
for Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch