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Published: August 26, 2020

Last Updated: December 30, 2020

A Canadian Tax Lawyer’s Guidelines to Specified Members of Partnerships

What is a Partnership Specified Member?

Partners in partnerships face different tax rules depending on the nature and amount of their involvement in the partnership. For example, under subsection 40(3.1) of the Income Tax Act, a passive member of a partnership can incur a deemed capital gain that an active member cannot. This difference occurs because a passive partner of the partnership is what is known as a “specified member” of that partnership. A specified member, as defined in subsection 248(1) of the Income Tax Act, is a partner who is either:

  • a limited partner;
  • a passive member of the partnership or does not carry on a business similar to that of the partnership outside the partnership.

This article shall address each part of this tax definition in turn.

Limited Partner

Though not all specified members are limited partners, any partner who is a limited partner within the period or year will be a specified member of that partnership. A limited partner is defined by subsection 94(2.1) of the Income Tax Act. Partnerships are flow-through entities. Their losses and gains are apportioned directly to the partners. As such, a limited partner is partner who either by the law governing the partnership agreement, or by another arrangement, has a limited liability for any of the partnership losses.

Passive vs. Active Member

A specified member is a partner who is not actively engaged in activity of the partnership (or is only actively engaged in financing the partnership) or who is not carrying on a business similar to the business of the partnership. The specified member must be actively engaging in the activity of the partnership or carrying on a business similar to the business of a partnership “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 and during which the” taxpayer is a partner of the partnership.

“Regular, continuous and substantial basis” is not a defined threshold of activity. The Canada Revenue Agency has issued several Technical Interpretations discussing this basis. It should be noted technical interpretations are the Canada Revenue Agency’s opinion in response to a particular inquiry, are non-binding and not necessarily indicative of the state of tax law on any given point. The Canada Revenue Agency considers active members to be those involved in the management or the daily activities of the partnership. In determining whether a taxpayer is an active member or specified member, the Canada Revenue Agency would consider “criteria such as time, work and energy that a person devotes to the business.” The Canada Revenue Agency determines each situation on its own facts, instead of applying a particular threshold test.

Further, the courts have not provided a clear definition of the meaning of “regular, continuous and substantial basis” for the purposes of defining who is a specified member. Most cases the courts have dealt with particularly concerning this definition have involved taxpayers who had only a cursory involvement in the partnership. For instance, in Muslanka v Canada 2004 TCC 158, the partners’ involvement amounted to attending two meetings and filling out some questionnaires. The court found this a “ridiculous attempt” to appear to be active members of the partnership.

The courts provided indication of what activity demonstrates whether a particular partner is an active partner or specified member in Simard v. The Queen, 2007 TCC 540. The taxpayer was found to be a specified member of the partnership because he was unable to prove he “always intended to be engaged in the partnership.” The taxpayer:

  • only filed out forms which had no material use
  • never attended partnership meetings
  • was not involved in partnership-related decisions
  • never inquired into the activities the partnership was conducting
  • had never met the other partners
  • never visited the premises of the partnership’s place of business.

What the courts have not clarified is what amount or frequency of activity is sufficient to be considered an active partner, instead of a specified member.

Pro Tax Tips: Faced with ambiguity, the Canada Revenue Agency will prefer its own opinion

Tax terms like “regular, continuous and substantial basis” which lack a specific definition or threshold test are often confusing for taxpayers and the Canada Revenue Agency alike. The specified member definition specifically is used in tax laws which are “anti-avoidance” measures, like subsection 40(3.1) of the Income Tax Act, which were implemented to catch taxpayers who were attempting to legally get around the tax rules which existed prior the anti-avoidance measure being introduced. The Canada Revenue Agency is therefore inclined to settle on an interpretation which benefits their position, and results in the taxpayer owing more in taxes. Our expert Canadian tax lawyers can develop and present arguments on your behalf to ensure the ambiguous definitions are applied to your benefit.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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