31 May 2012 External T.I. 2011-0426091E5 - 98(5) - ptnsp's leasehold int if ptnr is lessor

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: How to treat a leasehold interest held by a partnership before winding up under subsection 98(5) where a former partner is the lessor and the former partner/lessor will use the property that was subject to the lease in the business which had been formerly carried on by the partnership?

Position: Mixed question of law and fact.

Reasons: If the doctrine of merger applies, the treatment set out in the Supreme Court of Canada's decision in BCN would apply such that the leasehold interest would be considered to be disposed of for nil proceeds of disposition.

XXXXXXXXXX
					2011-042609
					J. Gibbons, CGA
May 31, 2012

Dear XXXXXXXXXX:

Re: Subsection 98(5) - Leasehold interest where the lessor is a partner

This is in reply to your email dated October 31, 2011, concerning the application of subsection 98(5) of the Income Tax Act (the “Act”) in the case of a leasehold interest held by a partnership on winding up (the “terminated partnership”) where a former partner is the lessor of the particular property. The former partner will carry on alone the business that was the business of the terminated partnership using the terminated partnership’s property, including the particular property.

In your view, by normal application of the “doctrine of merger,” the lesser interest in the particular property would merge with the greater interest, i.e., the leasehold interest would merge with the freehold interest, thereby resulting in the extinguishment of the leasehold interest. On this basis, you enquire whether the rollover rules in subsection 98(5) of the Act would apply to the leasehold held by the terminated partnership before winding up since the preamble to that provision refers to property that the former partner “continues to use.” In regard to meeting the latter requirement, it would appear that the leasehold interest would have to be considered as a separate property in the hands of the former partner even after it has merged with the freehold interest.

Our comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments.

In The Queen v. Compagnie Immobilière BCN Limitée (“BCN”), 79 DTC 5068, the Supreme Court of Canada made reference to the extinction of a property right through merger and opined that the acquisition of a lessor’s rights by the lessee brought about the extinguishment or destruction of the leasehold interest resulting in a disposition of such property. Since the doctrine of merger is a question of law that is beyond the scope of this letter, it is a question of fact whether the treatment set out in BCN would apply in the particular circumstances described in this letter. However, if it does apply to your case, such that the interest held by the terminated partnership would be considered destroyed, subsection 98(5) of the Act would not apply. Further, the terminated partnership would be considered to have disposed of its leasehold interest for nil proceeds of disposition, which could result in a terminal loss. In this regard, reference may be made to paragraph 10 of IT-464R, Capital Cost Allowance – Leasehold Interests.

We trust these comments will be of assistance.

Yours truly,

G. Moore
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch