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:
1. Will the registration of a general Alberta partnership of professionals as an Alberta Limited Liability Partnership (LLP) create a new partnership, cause the disposition of assets of the partnership at fair market value, or cause a disposition of partnership interests by partners within the meaning of the Act ?
2. Will a partner of an Alberta LLP be considered a "limited partner" within the meaning of either proposed paragraph 96(2.4)(a) or 40(3.14)(a) of the Act, assuming the draft legislation is passed in its present form ?
3. Will the deductibility of the reserve in respect of December 31, 1995 income provided by subsection 34.2(4) of the Act be affected by an Alberta partnership becoming an Alberta LLP ?
Position:
1. For the purposes of this letter, we assume that there is no agreement between the partners providing for the dissolution of the partnership in the event of the registration of that partnership as an Alberta LLP. In such a case, section 79.4 of the Alberta Partnership Act states that the registration of a partnership as an Alberta LLP does not cause the dissolution of the partnership, and the Alberta LLP continues as the same partnership that existed before the registration. Therefore, the partnership would not cease to exist and the registration of a general Alberta partnership of professionals as an Alberta LLP would not create a new partnership and would not cause the disposition of assets of the partnership at fair market value.
In the letter, it is indicated that there would be no change to the basic attributes of the partnership, such as capital accounts, percentage interest of partners in profits or net assets, identity of partners, business of partnership or percentage of liability for losses of each partner except for the LLP consequences. As such, the registration of a partnership as an Alberta LLP would not result in a disposition of the partnership interests of the partners.
2. Assuming that the proposed amendments to paragraphs 40(3.14)(a) and 96(2.4)(a) are passed as stated in the Notice of Ways and Means Motion to amend the Income Tax Act, the Income Tax Application Rules and certain Acts related to the Income Tax Act of June 5, 2000, the partners of an Alberta LLP would not be considered as limited partners under paragraphs 40(3.14)(a) and 96(2.4)(a) only by reason of the limitation of debts, obligations or liabilities provided in subsection 11.1(1) of the Alberta Partnership Act.
3. As noted above, we assume, for the purposes of this letter, that there is no provision in the partnership agreement providing for the dissolution of the partnership in the event of the registration as an Alberta LLP. As there is no dissolution of the partnership, the registration as an Alberta LLP would not affect the deductibility of the reserve in respect of December 31, 1995 income provided by subsection 34.2(4) of the Act.
Reasons:
1. The partnership does not cease to exist and there would be no change to the basic attributes of the partnership.
2. The wording of the exception provided by proposed paragraph 40(3.14)(a) and 96(2.4)(a) refers to debts, obligations and liabilities of the partnership, or any member of the partnership, arising from negligent acts or omissions or misconduct of those mentioned in the proposed paragraphs. The wording of subsection 11.1(1) of the Alberta Partnership Act refers to debts, obligations or liabilities arising from negligence, wrongful acts or omissions, malpractice or misconduct. In our view, debts, obligations or liabilities arising from negligent acts, omissions or misconduct would include debts, obligations or liabilities arising from "wrongful acts" and "malpractice" even if these expressions are not specifically listed in the exception in proposed paragraphs 40(3.14)(a) and 96(2.4)(a).
3. There is no dissolution of the partnership.
XXXXXXXXXX 2000-002677
Sylvie Labarre, CA
Attention: XXXXXXXXXX
June 29, 2000
Dear Sir\Madam:
Re: Alberta Limited Liability Partnerships
We are writing in response to your facsimile of May 17, 2000 in which you requested our opinion on certain tax consequences upon an Alberta general partnership registering to become an Alberta Limited Liability Partnership ("LLP").
Facts
On December 17, 1999, the Alberta Legislature declared in force amendments to the Alberta Partnership Act, together with regulations dealing with registration and related matters, which authorize the formation or continuation of specific partnerships as LLPs.
As a result of this legislation, doctors, dentists, lawyers, accountants, chiropractors and optometrists are allowed to carry on their partnership practices through an LLP.
Limitation of liability
The effect of registration as an LLP is set out in subsection 11.1(1) of the Alberta Partnership Act which states:
"... a partner in an Alberta LLP is not individually liable directly or indirectly, by means of indemnification, contribution, assessment or otherwise, for debts, obligations or liabilities of the partnership or another partner that arise from the negligence, wrongful acts or omissions, malpractice or misconduct of
(a) another partner, or
(b) an employee, agent or representative of the partnership,
that occur in the ordinary course of carrying on practice in an eligible profession within the meaning of section 79.1 while the partnership is an Alberta LLP."
The partner, however, continues to be liable for the ordinary debts of the partnership incurred in the course of business. It is only the liability for the specific tortious acts listed that does not flow through to the innocent partner.
Subsection 11.1(4) states that the limited liability protection of subsection (1) shall not be construed as offering any protection from claims against that partner's interest in the partnership property.
Registration as an Alberta LLP
Registration is effected by filing specified information with the Registrar. Related provisions of the Partnership Act include:
1. Subsection 79.2(3) provides that a limited partnership may not be registered as an Alberta LLP.
2. Subsection 79.3(4) provides that the registration of an Alberta LLP is not adversely affected by a change in the partners in the partnership.
3. Section 79.4 states that "Subject to any agreement between the partners, the registration of a partnership as an Alberta LLP does not cause the dissolution of the partnership, and the Alberta LLP continues as the same partnership that existed before the registration."
Miscellaneous
There would be no change to the basic attributes of the partnership, such as capital accounts, percentage interest of partners in profits or net assets, identity of partners, business of partnership or percentage of liability for losses of each partner except for the LLP consequences.
Questions
1. Will the registration of a general Alberta partnership of professionals as an Alberta LLP create a new partnership, cause the disposition of assets of the partnership at fair market value, or cause a disposition of partnership interests by partners within the meaning of the Income Tax Act (the "Act")?
2. Will a partner of an Alberta LLP be considered a "limited partner" within the meaning of either proposed paragraph 96(2.4)(a) or 40(3.14)(a) of the Act, assuming the draft legislation is passed in its present form?
3. Will the 10-year transitional reserve relating to 1995 change of year end to December 31 be affected by an Alberta partnership becoming an Alberta LLP?
As explained in Information Circular 70-6R3, it is not the Canada Customs and Revenue Agency's practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statements of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. We are therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.
Question 1
For the purposes of this letter, we will assume that there is no agreement between the partners providing for the dissolution of the partnership in the event of the registration of that partnership as an Alberta LLP. In such a case, section 79.4 of the Alberta Partnership Act states that the registration of a partnership as an Alberta LLP does not cause the dissolution of the partnership, and the Alberta LLP continues as the same partnership that existed before the registration. Therefore, the partnership would not cease to exist and the registration of a general Alberta partnership of professionals as an Alberta LLP would not create a new partnership and would not cause the disposition of assets of the partnership at fair market value.
In your letter, you indicate that there would be no change to the basic attributes of the partnership, such as capital accounts, percentage interest of partners in profits or net assets, identity of partners, business of partnership or percentage of liability for losses of each partner except for the LLP consequences. As such, the registration of a partnership as an Alberta LLP would not result in a disposition of the partnership interests of the partners.
Question 2
On June 5, 2000 the Department of Finance released a Notice of Ways and Means Motion to amend the Income Tax Act, the Income Tax Application Rules and certain Acts related to the Income Tax Act (the "Notice"). We note that in the Notice there is a change to the draft legislation issued on November 30, 1999 with regard to proposed paragraphs 40(3.14)(a) and 96(2.4)(a). The Notice states that these paragraphs are replaced by the following:
by operation of any law governing the partnership arrangement, the liability of the member as a member of the partnership is limited (except by operation of a provision of a statute of Canada or a province that limits the member's liability only for debts, obligations and liabilities of the partnership, or any member of the partnership, arising from negligent acts or omissions or misconduct that another member of the partnership or an employee, agent or representative of the partnership commits in the course of the partnership business while the partnership is a limited liability partnership);
The wording of the exception provided by proposed paragraphs 40(3.14)(a) and 96(2.4)(a) refers to debts, obligations and liabilities of the partnership, or any member of the partnership, arising from negligent acts or omissions or misconduct of those mentioned in the proposed paragraphs. The wording of subsection 11.1(1) of the Alberta Partnership Act refers to debts, obligations or liabilities arising from negligence, wrongful acts or omissions, malpractice or misconduct. In our view, debts, obligations or liabilities arising from negligent acts, omissions or misconduct would include debts, obligations or liabilities arising from "wrongful acts" and "malpractice" even if these expressions are not specifically listed in the exception to proposed paragraphs 40(3.14)(a) and 96(2.4)(a). Assuming that the proposed amendments to paragraphs 40(3.14)(a) and 96(2.4)(a) are passed as stated in the Notice, the partners of an Alberta LLP would not be considered as limited partners under paragraphs 40(3.14)(a) and 96(2.4)(a) only by reason of the limitation of debts, obligations or liabilities provided in subsection 11.1(1) of the Alberta Partnership Act.
Question 3
As noted above, we assume, for the purposes of this letter, that there is no provision contained in the partnership agreement providing for the dissolution of the partnership in the event of the registration as an Alberta LLP. As there is no dissolution of the partnership, the registration as an Alberta LLP would not affect the deductibility of the reserve in respect of December 31, 1995 income provided by subsection 34.2(4) of the Act.
We trust our comments will be of assistance to you. However, as indicated in paragraph 22 of Information Circular 70-6R3, this opinion is not a ruling and, accordingly, it is not binding on the Canada Customs and Revenue Agency.
Yours truly,
Marc Vanasse, CA
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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