11 October 2012 External T.I. 2012-0432861E5 - Clearance certificate under 159(2)

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: 1- Pursuant to subsection 159(2), is a general partner that is winding-up a limited partnership required to obtain a clearance certificate for the partnership before distributing the partnership property to the limited partners? 2- Pursuant to subsection 159(2), is a general partner (acting in that capacity) that is winding-up a limited partnership that is a Canadian partnership required to obtain a clearance certificate certifying that each respective limited partner has paid all income tax owing on partnership income allocated to that limited partner before the general partner can distribute any property to that limited partner on the winding-up of the partnership?

Position: 1- Yes, where certain provisions apply. 2- Generally, no.

Reasons: 1- Wording of certain provisions. For example, certain provisions provide that section 159 applies with any modifications that the circumstances require; accordingly, the reference to "taxpayer" in subsection 159(2) could be a reference to the partnership itself and, thus, the clearance certificate under that provision would be obtained for the partnership (i.e. analogous to a clearance certificate required for a corporation, trust or estate) 2- Wording of provisions.

XXXXXXXXXX 2012-043286
Katharine Skulski
October 11 2012

Dear XXXXXXXXXX:

Re: Subsection 159(2) certificates and limited partnerships

We are replying to your emails of December 15, 2011, January 10, 2012, January 24, 2012 and January 26, 2012 as well as to various telephone conversations (XXXXXXXXXX/Skulski) regarding whether subsection 159(2) of the Income Tax Act (the "Act") applies to limited partnerships and whether a general partner would be liable under subsection 159(3) of the Act for failing to obtain such a certificate on behalf of a limited partnership. We apologize for the delay in responding.

You have explained that a general partner, acting in its capacity as general partner of a limited partnership (that is a Canadian partnership), is winding-up the partnership and intends to distribute the partnership property to the limited partners. You have asked whether the general partner, acting in that capacity, is required to obtain a certificate for the limited partnership pursuant to subsection 159(2) prior to distributing the partnership property to the limited partners. You are also concerned that such a general partner would be required to obtain a clearance certificate certifying that each respective limited partner has paid all income tax owing on partnership income allocated to that limited partner before the general partner can distribute any property to that limited partner on the winding-up of the partnership. You have explained that all of the partners are resident in Canada for the purposes of your question and, as such, a certificate of compliance pursuant to section 116 is not required.

Our Comments

In general, subsection 159(2) requires that every legal representative (other than a trustee in bankruptcy) of a taxpayer obtain a certificate from the Minister before distributing to one or more persons any property in the possession or control of the legal representative acting in that capacity. Failure to obtain such a certificate will render the legal representative personally liable, under subsection 159(3), to pay any amounts referred to in subsection 159(2) to the extent of the value of the property distributed.

The term "legal representative" of a taxpayer is defined in subsection 248(1) and means "a trustee in bankruptcy, an assignee, a liquidator, a curator, a receiver of any kind, a trustee, an heir, an administrator, an executor, a liquidator of a succession, a committee, or any other like person, administering, winding up, controlling or otherwise dealing in a representative or fiduciary capacity with the property that belongs or belonged to, or that is or was held for the benefit of, the taxpayer or the taxpayer's estate".

In addition, the Act contains certain provisions which essentially provide that section 159 applies with any modifications that the circumstances require. Accordingly, in our view, the reference to "taxpayer" in subsection 159(2) could be a reference to the partnership itself and the certificate under that provision would be obtained for the partnership (i.e. analogous to a certificate required for a corporation, trust or estate). For example, a clearance certificate under subsection 159(2) would be required to ensure that all source deductions have been remitted before the partnership is wound-up.

On the basis of the foregoing, it is our general view that a general partner that is winding-up the limited partnership should obtain a certificate pursuant to subsection 159(2) for the limited partnership certifying that the tax debts of the limited partnership have been paid or security for the payment thereof has been accepted by the Minister before distributing the partnership property to the partners.

With respect to your specific concern that the general partner would also be required to obtain a clearance certificate under subsection 159(2) certifying that each limited partner has paid all income tax owing on partnership income allocated to that limited partner, it is our general view that such certification would not be required.

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch