CRA rules on the conversion of a carry to a straight-up interest

A limited partnership (Carry LP), that was owned directly or indirectly by two unrelated individuals (A and B) and their families, held a carry with an accrued gain in a Canadian fund (Fund LP), whose general partner was owned by A and B, and one of whose limited partners was a CCPC owned by A. Fund LP held a significant stake in a listed Canadian public corporation (Pubco) consisting of “Rollover Shares” (with accrued gains) and “Non-Rollover Shares” (which may have had accrued losses), as well as other investments (the “Other Investments”), and had no debt. In order to inter alia effectively convert the limited partnership interests in Fund LP to a single class of plain vanilla units:

  1. Fund LP sells enough of its shares on the stock exchanges in order to generate proceeds sufficient to distribute the amount of the contributed capital and preferred return thereon to all the non-carry partners, such that Carry LP and the other limited partners will now be entitled to share in future distributions on a pro rata basis.
  2. Fund LP transfers its Rollover Shares and Other Investments on a s. 97(2) rollover basis to a new subsidiary LP (New LP) in consideration for the plain-vanilla units.
  3. Within 30 days of 2 above, Fund LP is wound up such that its partners receive undivided interests in all its property (essentially, the Non-Rollover Shares and the units of New LP), with a joint s. 98(3) election filed.
  4. Pursuant to a partition agreement, each of the former partners receives a pro rata fraction of each Non-Rollover Share and each New LP Unit.
  5. The other former partners sell their respective fractions of Non-Rollover Shares to Carry LP for cash consideration equaling the FMV thereof.

CRA ruled inter alia re the application of s. 97(2) to the Fund LP wind-up, and as to s. 248(21) deeming there to be no disposition on the partition.

The CRA summary discloses that the requested rulings also included: that s. 40(3.4) did not apply to suspend the capital loss realized on the sale of the Non-Rollover Shares to Carry LP; and that an s. 40(3.12) election could be made with respect to the last fiscal period of Fund LP where the provisions of s. 98(1)(a) applied - as to which CRA noted:

No conclusion reached; ruling withdrawn.


Unable to rule. The question does not relate to a proposed transaction and will be further analysed in XXXXXXXXXX, if necessary. May result in timing issues with respect to adjusted cost base adjustments to the partnership interest.

Neal Armstrong. Summary of 2021 Ruling 2021-0895071R3 F under s. 98(3).