Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether a partnership can claim capital cost allowance on property in its last fiscal period where it subsequently continues as a sole proprietorship.
Position: Possibly.
Reasons: Interaction among subsections 98(1) and (5), and 99(1) of the Income Tax Act.
XXXXXXXXXX
2011-040300
André Gallant
June 25, 2012
Dear XXXXXXXXXX:
Re: Partnership Business Carried on as Sole Proprietorship and CCA Claims
We are writing in reply to your letter dated April 8, 2011, wherein you enquire whether a partnership can claim capital cost allowance (“CCA”) on property in its last fiscal period before subsequently continuing on as a sole proprietorship. We apologize for the delay in responding.
More specifically, you are asking about which of two different deeming provisions in the Income Tax Act (the “Act”) would apply first. These two deeming provisions, paragraph 98(5)(f) and the current version of subsection 99(1) of the Act, both appear to apply, in your view, at the same time (i.e. “immediately before” the partnership has ceased to exist).
Subsection 98(5) of the Act permits a tax-free rollover of assets from a discontinued partnership to a proprietorship. The rollover applies where, within three months of the termination of a Canadian partnership, one of the former partners carries on the business of the partnership as a sole proprietor using the property received by this former partner as proceeds of disposition of this partner’s partnership interest. More specifically, paragraph 98(5)(f) deems the partnership to have disposed of its property for proceeds equal to the cost amount immediately before the partnership has ceased to exist. You assume that all the requirements contained in subsection 98(5) have been met.
The current version of subsection 99(1) of the Act deems the fiscal period of a partnership that has ceased to exist to have ended immediately before the partnership has ceased to exist.
In your view, if paragraph 98(5)(f) applies before the current version of subsection 99(1), the partnership would not be entitled to claim CCA on property in its last fiscal period before subsequently continuing on as a sole proprietorship.
Our Comments
Whether a partnership in the process of dissolution has ceased to exist is a question of fact. Paragraph 98(1)(a) of the Act generally provides that for income tax purposes, a partner will be deemed not to have ceased to be a partner and the partnership is deemed not to have ceased to exist until all of the partnership property and any property substituted therefor has been distributed to the persons entitled by law to receive it. Subsection 99(1) provides that a fiscal period of a partnership is considered to end immediately before the particular time before the partnership ceases to exist. Subsequently, on the distribution of the property of the partnership there will be another fiscal period end.
Based on the wording in subsection 98(1), it is our view that the deeming rule in the current version of subsection 99(1) would apply before the deeming rule in paragraph 98(5)(f) if the partnership disposes of its property only after having ceased to exist.
Subsection 98(1) applies for the purpose of paragraph 98(5)(f) but not for the purpose of subsection 99(1). Generally, therefore, it is our view that the application of paragraph 98(5)(f) would be deferred until after the partnership has ceased to exist under provincial partnership law and after the application of subsection 99(1). It follows then that the partnership would have had the partnership property at the deemed year-end created under subsection 99(1), and could claim CCA on the asset for that fiscal year. As stated in paragraph 5 of the Interpretation Bulletin IT-285R2, Capital Cost Allowance – General Comments, generally, for a taxpayer to claim CCA on a property, the taxpayer must own the property.
We trust our comments will be of assistance to you.
Yours truly,
G. Moore
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2012
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2012
Email this Content