21 February 1996 External T.I. 9528135 - AMOUNTS PAID TO A RETIRING PARTNER

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether any portion of an amount paid to a retiring partner by another partner continuing to carry on the partnership business as a proprietor as contemplated by subsection 98(5) can be allocated to goodwill.

Position:

No.

Reasons:

Specifically prohibited by paragraph 95(1)(g)

			952813
XXXXXXXXXX		J.P. Dunn

Attention: XXXXXXXXXX

February 21, 1996

Dear Sirs:

Re: Subsection 98(5) of the Income Tax Act

We are writing in response to your correspondence of October 23, 1995 wherein you had requested the views of the Department with respect to certain provisions of subsection 98(5) of the Income Tax Act (the "Act") regarding the carrying on of a partnership business as a sole proprietorship by one of the former partners.

With respect to subparagraph 98(5)(a)(i) of the Act, you have noted that this provision was amended in 1994 to substitute "adjusted cost base to the proprietor of each other interest in the partnership" for "cost to the proprietor of each other interest in the partnership" and you have enquired as to the circumstances in which the adjusted cost base to the proprietor would differ from the cost to the proprietor of the other acquired partnership interests within the circumstances contemplated in subsection 98(5) of the Act. Although we are not able to specifically identify all circumstances in which such a difference would occur, we would note that, as described in the explanatory notes published by the Department of Finance at the time the amendment was introduced, one contemplated situation was the winding up of a corporation pursuant to subsection 88(1) of the Act. Similarly, we note that an adjustment to the adjusted cost base pursuant to paragraph 53(1)(f) may be required in any case in which the interest was acquired from a taxpayer which incurred a "superficial loss", within the meaning of that term in section 54 of the Act, upon the transfer of the interest to the proprietor.

We would note further that the reference to "adjusted cost base to the proprietor of each other interest" in subparagraph 95(1)(a)(i) of the Act refers to the adjusted cost base to the remaining partner (the "proprietor") carrying on the business of the former partnership of each partnership interest acquired from the former partners and not to the adjusted cost base of those interests to those former partners.

With respect to the amount paid by the remaining partner (the "proprietor") for a partnership interest of a former partner, we note that paragraph 95(1)(g) explicitly states that such an acquisition shall be considered to be an acquisition of a partnership interest and not to be an acquisition of any property of the former partnership. Accordingly, no amount of the cost of the acquisition by the proprietor can be considered to be an acquisition of property other than a partnership interest.

You had also enquired whether a partnership which had been comprised of two persons would be able to allocate an amount to a retiring partner as contemplated by subsection 96(1.1) of the Act in the event that one of the partners continued to carry on the business of the former partnership as a sole proprietor. As noted by the Department in response to a question at the 1994 conference of the Canadian Tax Foundation, it is the view of the Department that,

subsection 96(1.1) applies where the principal activity of a partnership is carrying on a business in Canada and a share of the income or loss of the partnership is allocated to a taxpayer who ceased to be a member of the partnership pursuant to an agreement referred to in that subsection. For subsection 96(1.1) to apply, the partnership must exist at the time the allocation is made and it must be carrying on a business.

Generally, provincial partnership acts define a partnership as being the relationship that subsists between persons carrying on a business in common with a view to profit.

Where a taxpayer is carrying on a business alone as a sole proprietor, there is no partnership in existence. Therefore, it is our view that subsection 96(1.1) cannot be applied to allocate a portion of the income of the proprietor to another taxpayer.

Accordingly, it is the view of the Department that subsection 96(1.1) of the Act would not be applicable in the circumstances presented in your example. We have, however, as you had requested, forwarded a copy of both your letter and our reply to the Department of Finance for their consideration.

We trust that this is the information which you require.

Section Chief
Leasing and Finance Section
Financial Industries Directorate
Income Tax Rulings and
Interpretation Directorate