2001 Ruling 2000-0060603 - Merger of XXXXXXXXXX Partnerships

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. Whether merger of two XXXXXXXXXX partnerships can be effected through the application of 97(2), 98(3) and the partitioning of an undivided joint interest in the successor partnership.

2. Where one partnership is dissolved and the partners become members in the successor partnership the business of which will include the business of the dissolved partnership in the course of the merger, whether the partners' existing entitlement to a reserve under 34.2(4) is effected.

Position:

1. Yes.

2. Yes.

Reasons:

1. Transactions satisfy requirements 97(2) and 98(3) and the partition does not result in a disposition under section 54.

2. The business will be carried on principally by the successor partnership such that 34.2(6)(c)(i) will not deny the reserve.

XXXXXXXXXX 								2000-006060

Attention: XXXXXXXXXX

XXXXXXXXXX, 2001

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

We are writing in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge our various telephone conversations in connection with the ruling request.

You advise that to the best of your knowledge, none of the issues involved in this ruling are being considered by a tax services office or taxation centre in connection with a tax return already filed and none of the issues is under objection or appeal.

Our understanding of the facts, proposed transactions and their purposes is as follows.

FACTS

1. XXXXXXXXXX is a general partnership formed under the laws of XXXXXXXXXX (the "XXXXXXXXXX Partnership"). Its income tax identification number is XXXXXXXXXX.

2. XXXXXXXXXX is a XXXXXXXXXX partnership formed under the laws of XXXXXXXXXX (the "XXXXXXXXXX Partnership"). Its income tax identification number is XXXXXXXXX .

3. All of the current members of the XXXXXXXXXX Partnership (the "XXXXXXXXXX Partners") and of the XXXXXXXXXX Partnership (the "XXXXXXXXXX Partners") are resident in Canada for the purposes of the Income Tax Act (the "Act").

4. The XXXXXXXXXX Partnership carries on the business of providing XXXXXXXXXX services XXXXXXXXXX.

5. The XXXXXXXXXX Partnership carries on the business of providing XXXXXXXXXX services in Canada XXXXXXXXXX.

6. The XXXXXXXXXX Partnership also operates, in joint venture with XXXXXXXXXX (the "Joint Ventures").

7. XXXXXXXXXX.

8. Certain of the XXXXXXXXXX Partners are entitled, pursuant to subsection 23(3) of the Income Tax Application Rules (the "ITAR"), to deduct in computing their incomes for each taxation year from the business of the XXXXXXXXXX Partnership an amount in respect of their 1971 receivables.

9. Certain of the XXXXXXXXXX Partners are entitled, pursuant to section 34.2 of the Act, to deduct in computing their incomes for the 1995 and subsequent taxation years an amount as a reserve for December 31, 1995 income from the business of the XXXXXXXXXX Partnership.

10. XXXXXXXXXX persons ceased to be members of the XXXXXXXXXX Partnership during the XXXXXXXXXX Partnership's XXXXXXXXXX taxation year (the "Retired Partners"). The Retired Partners are entitled to receive their share of any partnership income, but only such income that is allocated by the XXXXXXXXXX Partnership for the period commencing XXXXXXXXXX, and ending upon the date of their departure, in accordance with the XXXXXXXXXX Partnership's ordinary income allocation scheme for the year. Such income will be distributed to them in accordance with the XXXXXXXXXX Partnership's ordinary distribution policy. XXXXXXXXXX.

11. Both the XXXXXXXXXX Partners and the XXXXXXXXXX Partners have formed limited partnerships (the "XXXXXXXXXX Management Partnership" and the "XXXXXXXXXX Management Partnership", respectively) to provide management-type services to their respective XXXXXXXXXX partnerships. XXXXXXXXXX (Consideration will be given to merging the XXXXXXXXXX Management Partnership and XXXXXXXXXX Management Partnerships at a future time. In this regard, it is currently contemplated that all the partners of each Management Partnership, with the exception of the general partners, will transfer their respective partnership interests to a new partnership in consideration for partnership interests therein pursuant to subsection 97(2) of the Act. Alternatively, the XXXXXXXXXX Partners will transfer their interests in the XXXXXXXXXX Management Partnership to the XXXXXXXXXX Management Partnership in consideration for partnership interests pursuant to subsection 97(2) of the Act. Such transactions are not the subject of this advance income tax ruling.)

12. XXXXXXXXXX.

PROPOSED TRANSACTIONS

13. The XXXXXXXXXX Partnership will make an election under paragraph 34(a) of the Act in respect of its work in progress at the end of its XXXXXXXXXX taxation year.

14. XXXXXXXXXX.

15. XXXXXXXXXX.

16. XXXXXXXXXX.

17. On the Effective Date, all of the XXXXXXXXXX Partners will be admitted as partners in the XXXXXXXXXX Partnership, in consideration for their commitment to provide professional XXXXXXXXXX services to third parties together with the XXXXXXXXXX Partners. XXXXXXXXXX.

18. XXXXXXXXXX.

19. On the Effective Date, the XXXXXXXXXX Partnership will sell its business and, except as noted in 22 below, all of its partnership property (the "XXXXXXXXXX Assets"), consisting principally of capital property, eligible capital property, accounts receivable (the "Receivables") and inventory (including work in progress), to the XXXXXXXXXX Partnership (the "Transfer").

20. As the aggregate consideration for the Transfer, the XXXXXXXXXX Partnership will:

- assume all the liabilities of the XXXXXXXXXX Partnership (except those in respect of the Joint Ventures and any potential XXXXXXXXXX liabilities XXXXXXXXXX of the XXXXXXXXXX Partners which are not covered by the XXXXXXXXXX Partnership's XXXXXXXXXX insurance) (the "XXXXXXXXXX Liabilities"), and

- grant to the XXXXXXXXXX Partnership a partnership interest in the XXXXXXXXXX Partnership (the "XXXXXXXXXX Partnership Interest").

21. The fair market value of the XXXXXXXXXX Partnership Interest will be equal to the fair market value of the XXXXXXXXXX Assets less the XXXXXXXXXX Liabilities. The fair market value of the Receivables will be determined by applying an appropriate discount to reflect their collectibility. The parties will agree to allocate to each of the XXXXXXXXXX Assets, as consideration therefor, such part of the aggregate consideration to be given by the XXXXXXXXXX Partnership for all the XXXXXXXXXX Assets as is equal to the fair market value of the particular XXXXXXXXXX Asset.

22. Some cash may be retained by the XXXXXXXXXX Partnership. The XXXXXXXXXX Lease will either be assigned directly to the XXXXXXXXXX Partnership or will be assigned to the XXXXXXXXXX Management Partnership, which will then enter into a sub-lease with the XXXXXXXXXX Partnership. XXXXXXXXXX.

23. The business formerly carried on by the XXXXXXXXXX Partnership in XXXXXXXXXX will continue to be carried on, without interruption, by the XXXXXXXXXX Partnership as part of its existing business; however, the name of the XXXXXXXXXX Partnership will be changed to XXXXXXXXXX.

24. Pursuant to subsection 97(2) of the Act, the XXXXXXXXXX Partnership and all the other members of the XXXXXXXXXX Partnership will jointly elect in accordance with subsection 96(3) of the Act, in prescribed form and within the time referred to in subsection 96(4) of the Act, that the XXXXXXXXXX Partnership's proceeds of disposition, and the XXXXXXXXXX Partnership's cost, of each of the XXXXXXXXXX Assets shall be deemed to be an amount equal to the lower of its fair market value and the cost amount thereof to the XXXXXXXXXX Partnership immediately before the Transfer. The amount elected in respect of the XXXXXXXXXX Assets consisting of goodwill and work in progress will be XXXXXXXXXX The XXXXXXXXXX Liabilities assumed will be allocated to specific XXXXXXXXXX Assets transferred. The amount of the XXXXXXXXXX Liabilities to be allocated to a XXXXXXXXXX Asset transferred pursuant to subsection 97(2) of the Act will not exceed the elected amount in respect of that XXXXXXXXXX Asset.

25. Pursuant to subsection 22(1) of the Act, the XXXXXXXXXX Partnership and the XXXXXXXXXX Partnership will jointly elect, in prescribed form and in accordance with subsection 96(3), to have section 22 of the Act apply to the Transfer of the Receivables.

26. Notwithstanding the dissolution of the XXXXXXXXXX Partnership described in 27 below, to maintain its right to claim a refund of the Goods and Services Tax ("GST") and XXXXXXXXXX remitted to the Canada Customs and Revenue Agency ("CCRA") and XXXXXXXXXX respectively, in respect of any such Receivables that are subsequently determined to have become bad debts or in respect of which a credit note is issued (the "GST/XXXXXXXXXX Rights"), the XXXXXXXXXX Partnership, in accordance with the relevant GST and XXXXXXXXXX legislation, will not relinquish its GST and XXXXXXXXXX registration numbers immediately upon dissolution.

27. The XXXXXXXXXX Partnership will be dissolved and all its partnership property, in particular the XXXXXXXXXX Partnership Interest, and including any GST/XXXXXXXXXX Rights, will be distributed to the persons who were members of the XXXXXXXXXX Partnership immediately before it ceased to exist (a "Former XXXXXXXXXX Partner") so that, immediately after the XXXXXXXXXX Partnership ceases to exist, each such Former XXXXXXXXXX Partner has an undivided interest in each such property, in particular, the XXXXXXXXXX Partnership Interest that, when expressed as a percentage of all undivided interests in the property, is equal to such Former XXXXXXXXXX Partner's undivided interest in each other such property (the "Distribution").

28. If, prior to the Distribution, a XXXXXXXXXX Partner's percentage share of the capital of the XXXXXXXXXX Partnership differs from the desired percentage share of such member (which may arise, for example, where the applicable capital contribution is permitted to be made over a period of time), the XXXXXXXXXX Partnership will borrow money from an arm's length financial institution and distribute the necessary amount in reduction of the member's capital account or the member will contribute to the XXXXXXXXXX Partnership the necessary amount, as circumstances warrant, such that the member's percentage share of the capital of the XXXXXXXXXX Partnership will be equal to the desired percentage share of the capital of the Partnership at the time of the Distribution.

29. Pursuant to subsection 98(3) of the Act, each Former XXXXXXXXXX Partner will jointly elect in respect of the XXXXXXXXXX Partnership Interest, in prescribed form and within the time referred to in subsection 96(4) of the Act, that each such Former XXXXXXXXXX Partner's proceeds of disposition of his or her interest in the XXXXXXXXXX Partnership, the cost to each such Former XXXXXXXXXX Partner of his or her undivided interest in the XXXXXXXXXX Partnership Interest and the XXXXXXXXXX Partnership's proceeds of disposition of the XXXXXXXXXX Partnership Interest shall be determined in accordance with the rules in subsection 98(3) of the Act. In particular, it is intended that the adjusted cost base of each of the Former XXXXXXXXXX Partners' respective undivided interests in the XXXXXXXXXX Partnership Interest will be increased to the extent of the amount, if any, determined under paragraph 98(3)(c) of the Act in respect of each such Former XXXXXXXXXX Partner's undivided interest therein.

30. The XXXXXXXXXX Partnership Interest will then be the subject of a partition among the Former XXXXXXXXXX Partners and as a consequence thereof, each such Former XXXXXXXXXX Partner will have, in the XXXXXXXXXX Partnership Interest, a new interest the fair market value of which immediately after such partition, expressed as a percentage of the fair market value of all the new interests in the XXXXXXXXXX Partnership Interest immediately after such partition, is equal to the fair market value of that Former XXXXXXXXXX Partner's undivided interest in the XXXXXXXXXX Partnership Interest immediately before such partition, expressed as a percentage of the fair market value of all the undivided interests in the XXXXXXXXXX Partnership Interest immediately before such partition (the "Partition").

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to merge, or to facilitate the merger of, the businesses of the XXXXXXXXXX Partnership and the XXXXXXXXXX Partnership, which is expected to give rise to significant commercial and professional benefits for all parties concerned.

RULINGS GIVEN

Provided that: (a) the facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate; (b) the final version of the implementing documentation accurately reflects such facts, proposed transactions and purposes; and (c) the proposed transactions are carried out as described above, we confirm the following.

A. Provided the XXXXXXXXXX Partnership is a Canadian partnership, as defined in subsection 102(1) of the Act, immediately after the Transfer, the provisions of subsection 97(2) and paragraphs 85(1)(a) to (f), other than paragraph 85(1)(e.2), read in the manner set out in paragraph 97(2)(a) of the Act, will apply to the Transfer (as described in 19, 20, 21, 23, and 24 above) to determine the amount of the XXXXXXXXXX Partnership's proceeds of disposition, and the XXXXXXXXXX Partnership's cost, of each of the XXXXXXXXXX Assets, as well as the amount of the cost to the XXXXXXXXXX Partnership of the XXXXXXXXXX Partnership Interest.

B. The provisions of subsection 22(1) of the Act will apply to the Transfer of the Receivables as described in 25 above.

C. Provided the XXXXXXXXXX Partnership is a Canadian partnership, as defined in subsection 102(1) of the Act, at the time it ceases to exist as described in 27 above, the provisions of subsection 98(3) of the Act will apply to the Distribution (as described in 27 above) to determine the amount of each Former XXXXXXXXXX Partner's proceeds of disposition of his or her interest in the XXXXXXXXXX Partnership, the cost to each such Former XXXXXXXXXX Partner of his or her undivided interest in each property of the XXXXXXXXXX Partnership, including the XXXXXXXXXX Partnership Interest, and the XXXXXXXXXX Partnership's proceeds of disposition of the XXXXXXXXXX Partnership Interest.

D. If a Retired Partner has a residual interest, as described in subsection 98.1(1) of the Act, in the XXXXXXXXXX Partnership immediately before it ceases to exist as described in 27 above, such Retired Partner will not be a member of the XXXXXXXXXX Partnership for purposes of the application of subsection 98(3) of the Act described in ruling C above.

E. The Partition described in 30 above will not constitute a disposition, within the meaning of section 54 of the Act, of property by the Former XXXXXXXXXX Partners.

F. For the purposes of paragraph 34.2(6)(c) of the Act, the business formerly carried on by the XXXXXXXXXX Partnership will be considered to be carried on principally by the XXXXXXXXXX Partnership such that the Former XXXXXXXXXX Partners referred to in 9 above will not be precluded from claiming a deduction under subsection 34.2(4) of the Act because of the dissolution of the XXXXXXXXXX Partnership, as described in 27 above, in and by itself.

G. For the purposes of subsection 23(3) of the ITAR, each Former XXXXXXXXXX Partner referred to in 8 above who becomes a member of the XXXXXXXXXX Partnership as described in 17 above will be considered to be carrying on the same business as he or she formerly carried on as a member of the XXXXXXXXXX Partnership.

H. The provisions of subsections 56(2), 56(4) and 246(1) of the Act will not be applied as a result of the proposed transactions in and by themselves.

I. As a result of the proposed transactions, in and by themselves, the provisions of subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 and are binding on the CCRA provided the proposed transactions are implemented on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto. Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

OPINION

Provided the proposed definition of "disposition" in subsection 248(1) of the Act set out in the Notice of Ways and Means Motion - Migration Rules, Trust Proposals, Resource Expenditures and Technical Amendments - June 5, 2000 is enacted into law, it is our opinion that the Partition described in 30 above will not constitute a disposition, within the meaning of the proposed definition thereof in subsection 248(1) of the Act, of property by the Former XXXXXXXXXX Partners.

The foregoing opinion is provided in accordance with the policy described in paragraph 22 of Information Circular 70-6R3 and, as stated therein, is not binding on the CCRA.

Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch