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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Is the excess, described in subparagraph 98(5)(b)(ii) lost if there is no capital property to bump (per 98(5)(c))?
Position: yes
Reasons: 98(5)(c) applies only to "non-depreciable capital property" after December 4, 1985
XXXXXXXXXX 2001-010413
Shaun Harkin, CMA
November 23, 2001
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Subsection 98(5)
This is in reply to your facsimile of October 2, 2001 wherein you asked about the application of subsection 98(5) of the Income Tax Act (the "Act") in the following hypothetical situation:
(1) Company A wishes to purchase Company B's partnership interest and continue to carry on the partnership as a sole proprietor. The price paid to Company B will be equal to Company B's capital account plus a "goodwill" component. As a result of this "goodwill" component, the adjusted cost base of Company A's partnership interest will exceed the aggregate cost amounts of the partnership property received by Company A.
(2) The partnership owns no capital property other than depreciable property. It has no eligible capital property, as the partnership itself has never purchased goodwill.
Specifically, you asked, what happens to the "goodwill" component within the partnership interest when Company A purchases Company B's partnership interest and continues to carry on the partnership as a sole proprietor?
Assuming the Company A and Company B partnership is a Canadian partnership, we agree with your understanding that subsection 98(5) of the Act would apply to the situation you described when Company A purchases Company's B partnership interest and continues to carry on the partnership as a sole proprietor.
With respect to the amount paid by Company A for Company B's partnership interest, paragraph 98(5)(g) of the Act 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. Since no amount of the cost of the acquisition by Company A can be considered to be an acquisition of property other than a partnership interest, no amount can be allocated to goodwill.
The cost to Company A of each partnership property will be deemed by paragraph 98(5)(b) of the Act to be the cost amount of the property to the partnership plus the amount of any "bump" permitted by paragraph 98(5)(c) of the Act for capital property other than depreciable property. In the situation you described, the adjusted cost base of Company A's partnership interest exceeds the aggregate cost amounts of the partnership property received by Company A; therefore, Company A may allocate the excess, with certain restrictions, among the capital property received by Company A as a "bump" to the cost amount of each property. Subsection 98(5) of the Act now limits the bump to capital property other than depreciable property where, generally, the partnership property was acquired by the partnership, or the partner acquired the partnership interest, after December 4, 1985.
In the situation you describe, when the partnership ceases to exist Company A will receive only depreciable property of the partnership as proceeds for the disposition of its partnership interest. Therefore, if the bump is not permitted to depreciable property that Company A received, then, it is our view, that there are no other provisions in the Act that would allow the use of the "goodwill" component.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.
We trust the above comments are of assistance.
Yours truly,
Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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