2002 Ruling 2002-0132913 - SAME BUSINESS

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: whether 4 partnerships are the same business

Position: yes

Reasons: peculiar fact situation; all partnerships are owned in the same proportion (indirectly) by the same individuals; all sell and service XXXXXXXXXX which also required control by one individual; partnerships and their employees work together;

XXXXXXXXXX 2002-013291

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested advance income tax rulings on behalf of the above taxpayers as well as your subsequent correspondence and our telephone conversations on this matter.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one or any of the taxpayers or a related person;

(iii) under objection by one or any of the taxpayers or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

In this letter, the following terms have the meanings specified:

(a) "Adjusted cost base" ("ACB") has the meaning assigned by section 54 of the Act;

(b) "Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(c) "Canadian partnership" has the meaning assigned by subsection 102(1) of the Act;

(d) "City" means the city of XXXXXXXXXX in the Province;

(e) "Company A" means XXXXXXXXXX, a taxable Canadian corporation incorporated under the laws of Province. All of the issued and outstanding shares of Company A are owned directly by Company AA (XXXXXXXXXX);

(f) "Company AA" means XXXXXXXXXX% of the issued and outstanding shares of Company AA are owned by Mr. A and the remaining XXXXXXXXXX% are owned by Mrs. A;

(g) "Company A1" means XXXXXXXXXX, a taxable Canadian corporation incorporated under the laws of the Province. All of the issued and outstanding shares of Company A1 are owned directly by Company A (XXXXXXXXXX);

(h) "Company A2" means XXXXXXXXXX, a taxable Canadian corporation incorporated under the laws of the Province. All of the issued and outstanding shares of Company A2 are owned directly by Company A (XXXXXXXXXX);

(i) "Company A3" means XXXXXXXXXX, a taxable Canadian corporation incorporated under the laws of the Province. All of the issued and outstanding shares of Company A3 are owned directly by Company A (XXXXXXXXXX);

(j) "Company B" means XXXXXXXXXX, a taxable Canadian corporation incorporated under the laws of the Province. All of the issued and outstanding shares of Company B are owned by Mr. B and Trust B (XXXXXXXXXX);

(k) "Company C" means XXXXXXXXXX, a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX. All of the issued and outstanding shares of Company C are owned in equal proportions by Mr. C and Trust C (XXXXXXXXXX);

(l) "Cumulative eligible capital" has the meaning assigned by subsection 14(5) of the Act;

(m) "Mr. A" means XXXXXXXXXX;

(n) "Mrs. A" means XXXXXXXXXX;

(o) "Mr. B" means XXXXXXXXXX;

(p) "Mr. C" means XXXXXXXXXX;

(q) "Partnership A" means XXXXXXXXXX, a partnership formed on XXXXXXXXXX under the laws of the Province;

(r) "Partnership Act" means the XXXXXXXXXX;

(s) "Partnership B" means XXXXXXXXXX, a partnership formed on XXXXXXXXXX under the laws of the Province;

(t) "Partnership C" means XXXXXXXXXX, a partnership formed on XXXXXXXXXX under the laws of the Province;

(u) "Partnership D" means XXXXXXXXXX, a partnership formed on XXXXXXXXXX under the laws of the Province;

(v) "Partnerships" means Partnership A, Partnership B, Partnership C, and Partnership D, singularly or collectively;

(w) "Products" means XXXXXXXXXX;

(x) "Province" means the Province of XXXXXXXXXX;

(y) "Regulations" means the Income Tax Regulations;

(z) "Related persons" has the meaning assigned by subsection 251(2) of the Act;

(aa) "Supplier" means XXXXXXXXXX;

(bb) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(cc) "Termination year(s)" means the taxation year(s) ending immediately before the windings-up described in paragraphs 22 and 23 below;

(dd) "Trust B" means the XXXXXXXXXX;

(ee) "Trust C" means the XXXXXXXXXX.

FACTS

1. Partnership A has carried on the business of XXXXXXXXXX. The partners of Partnership A and their interests in Partnership A are Company A (XXXXXXXXXX %), Company B (XXXXXXXXXX%) and Company C (XXXXXXXXXX%) and Company A1 (XXXXXXXXXX%). The fiscal period of Partnership A ends on XXXXXXXXXX of each calendar year.

2. Partnership B has carried on the business of XXXXXXXXXX. The partners of Partnership B and their interests in Partnership B are Company A (XXXXXXXXXX%), Company B (XXXXXXXXXX%) and Company C (XXXXXXXXXX%) and Company A2 (XXXXXXXXXX%). The fiscal period of Partnership B ends on XXXXXXXXXX of each calendar year.

3. Partnership C has carried on the business of XXXXXXXXXX. The partners of Partnership C and their interests in Partnership C are Company A (XXXXXXXXXX%), Company B (XXXXXXXXXX%) and Company C (XXXXXXXXXX%) and Company A3 (XXXXXXXXXX%). The fiscal period of Partnership C ends on XXXXXXXXXX of each calendar year.

4. You have advised that Partnership A, Partnership B and Partnership C were created as three separate partnerships because, at that time, Supplier was familiar with businesses that had one XXXXXXXXXX and several XXXXXXXXXX, and with businesses that had several XXXXXXXXXX and one XXXXXXXXXX, but not with businesses with several XXXXXXXXXX and several XXXXXXXXXX. At that time, Supplier knew Mr. A quite well, but was not as familiar with Mr. B and Mr. C. Supplier requested that Mr. A set up three separate entities and that Mr. A control all three entities. All the parties, including Supplier, determined that the partnership form of organization would best suit the needs of all parties. You have assured us that since XXXXXXXXXX and until the proposed transactions are effected, there has been and will be no prohibition pursuant to the relevant XXXXXXXXXX Agreements or any other agreements with any of the persons, including Supplier, named in this advance income tax ruling that have or would prohibit the operating of the businesses of Partnership A, Partnership B, Partnership C or Partnership D as one business.

5. Partnership D has carried on the business of XXXXXXXXXX. The partners of Partnership D and their interests in Partnership D are Partnership B (XXXXXXXXXX%) and Partnership C (XXXXXXXXXX%) The fiscal period of Partnership D ends on XXXXXXXXXX of each calendar year.

6. Each of Partnership A, Partnership B, Partnership C, and Partnership D is a Canadian partnership.

7. Mr. A, Mr. B and Mr. C are not related persons.

8. Mr. A is listed as the XXXXXXXXXX principal with Supplier for the business of Partnership A, Partnership B and Partnership C. Mr. B is listed as the executive manager for the businesses of Partnership B and Partnership C and Mr. C is listed as the executive manager for the business of Partnership A.

9. The managing partner of each of Partnership A, Partnership B and Partnership C are Company A1, Company A2, and Company A3, respectively. Mr. A, as the indirect shareholder, director and president of each of Company A1, Company A2 and Company A3 controls each of Partnership A, Partnership B and Partnership C. Under clause XXXXXXXXXX of each Partnership agreement, each managing partner nominates a particular individual as the executive manager of each partnership. In the case of Partnership A, Mr. C is nominated as the executive manager, and in the case of Partnership B and Partnership C, Mr. B is nominated as the executive manager. On a day-to-day basis, Mr. B is primarily responsible for the management of Partnership B and Partnership C and Mr. C is primarily responsible for the management of Partnership A. Mr. A splits his management responsibilities between the businesses of Partnership A, Partnership B and Partnership C. However, each of Mr. A, Mr. B, and Mr. C have some level of responsibility for each of the Partnerships and, as a group, Mr. A, Mr. B and Mr. C make strategic decisions for the businesses of Partnership A, Partnership B and Partnership C.

10. You have advised that Supplier treats the purchase of products by Partnership A, Partnership B and Partnership C as transactions with one entity when it determines the product bonuses, which are calculated at the end of the year. The higher the number of products purchased from Supplier, the higher the cash bonus per product purchased. Therefore, Supplier includes all of the products purchased by Partnership A, Partnership B and Partnership C in the calculation of the cash bonuses per product. The cheques are distributed annually in the name of one of Partnership A, Partnership B, or Partnership C by Supplier. The recipient Partnership then distributes the funds to the other Partnerships on a pro rata basis.

11. Partnership A, Partnership B and Partnership C have a common Chief Financial Officer (the "CFO"). The CFO deals with financing and borrowing for all of the Partnerships, and negotiates with XXXXXXXXXX financial institutions in order to obtain the best financing rates. The CFO also negotiates insurance for the Partnerships. The insurance brokers take into account the insurance needs of the businesses of the Partnerships collectively when obtaining quotes from insurance companies, since the per unit rate for insurance decreases with increased volume.

12. Each of Partnership A, Partnership B and Partnership C is owned in the same proportion by various corporations making the ultimate ownership structure identical amongst the partnerships. Each of the partnership agreements is, in substance, identical to each of the other partnership agreements.

13. The business of Partnership B and Partnership C are located in the same premises. These businesses share a common head office location, common employees and a common parts inventory. In addition, they own an undivided 50-50 interest in all the capital assets, including the XXXXXXXXXX. The employees of Partnership B and Partnership C are a single group - each employee works for the businesses of both Partnership B and Partnership C.

14. The land and the buildings used by Partnership A, Partnership B and Partnership C are leased from Company AA.

15. Each of the Partnership A, Partnership B and Partnership C has contracts with Supplier to supply and service Products to the City market thus supplying similar types of inventory and using the same supplier. Partnership D does not have specific contracts with Supplier, however, Partnership D is a partnership of Partnership B and Partnership C and Partnership D carries on certain joint operations of Partnership B and Partnership C. In addition to new product inventory, Supplier supplies all parts and provides support, service and training to each of the Partnerships. To the extent that a customer cannot find the product they want or a certain part at one of the Partnerships then each of Partnership A, Partnership B and Partnership C will exchange inventory in an effort to satisfy the customer.

16. The processes used to get the products to the end consumer are similar in each Partnership. In addition, each Partnership offers the same services to the consumer, i.e., XXXXXXXXXX.

17. The customer base is similar amongst each of the Partnerships.

18. The operational management team at each of Partnership A, Partnership B and Partnership C XXXXXXXXXX attend common training sessions and meetings throughout the year. The technicians working in the businesses of the Partnerships attend courses together on specific areas as XXXXXXXXXX, and other areas.

19. Partnership A, Partnership B and Partnership C negotiate common purchasing, banking, data processing, advertising and benefits packages in an effort to achieve cost efficiencies. The Partnerships have used a common advertising agency for producing creative, promotional material and the negotiation of media contracts. City newspapers, radio stations and television stations treat the Partnerships as one entity when they price their media, thus allowing the businesses of the Partnerships lower rates based on volumes. The businesses of the Partnerships are involved in joint advertising campaigns.

20. Partnership A, Partnership B and Partnership C use the same accounting system to record financial information and they share computer hardware and software and data processing services. They also contract with the same accountants and legal counsel.

21. If only one partnership had existed instead of the four Partnerships, the tax result of each of the partners of the Partnerships would remain unchanged for every year since the inception of the Partnerships.

PROPOSED TRANSACTIONS

22. On or about XXXXXXXXXX, each of the Partnerships and the partners of the Partnership will enter into an agreement to provide that each of the partners of the Partnership will, as a contribution of capital to each of the Partnerships, assume its proportionate share of the liabilities of each of the Partnerships.

23. Immediately after the completion of the transactions described in paragraph 22 above, all of the assets of Partnership D will be distributed to the partners of Partnership D pro rata based on the percentage interest in Partnership D of each of its partners, as described in paragraph 5 above. Immediately thereafter, each of the partners of Partnership D will have an undivided interest in each property distributed that, when expressed as a percentage of all of the undivided interests in the property, will be equal to its undivided interest in Partnership D and Partnership D will be dissolved. Each of the partners of Partnership D will jointly elect in respect of each such property in prescribed form and within the time referred to in subsection 96(4) of the Act to have the provisions of subsection 98(3) of the Act apply in respect of the dissolution of Partnership D.

24. Immediately after the completion of the transactions described in paragraph 23 above, all of the assets of each of Partnership A, Partnership B and Partnership C will be distributed to its partners pro rata based on the percentage interest in each of Partnership A, Partnership B, and Partnership C of each of its partners, as described, respectively, in paragraphs 1, 2 and 3 above. Immediately thereafter, each of the partners of Partnership A, Partnership B and Partnership C, respectively, will have an undivided interest in each property distributed that, when expressed as a percentage of all of the undivided interests in the property, will be equal to its undivided interest in each of Partnership A, Partnership B, and Partnership C and Partnership A, Partnership B, and Partnership C will be dissolved. Each of the partners of Partnership A, Partnership B and Partnership C will jointly elect in respect of each such property in prescribed form and within the time referred to in subsection 96(4) of the Act to have the provisions of subsection 98(3) of the Act apply in respect of the dissolution of Partnership A, Partnership B, and Partnership C.

25. After the completion of the transactions described in paragraph 24 above, each of the following transactions (described in paragraphs 26 to 31 below) will occur concurrently.

26. Company A will sell its undivided interest in each of the assets received on the dissolution of Partnership B and Partnership C to Company B at fair market value for cash or other consideration.

27. Company C will sell its undivided interest in each of the assets received on the dissolution of Partnership B and Partnership C to Company B at fair market value for cash or other consideration.

28. Company A3 will sell its undivided interest in each of the assets received on the dissolution of Partnership C to Company B at fair market value for cash or other consideration.

29. Company A2 will sell its undivided interest in each of the assets received on the dissolution of Partnership B to Company B at fair market value for cash or other consideration.

30. Company B will sell its undivided interest in each of the assets received on the dissolution of Partnership A to Company C at fair market value for cash or other consideration.

31. Company A1 will sell its undivided interest in each of the assets received on the dissolution of Partnership A to Company C at fair market value for cash or other consideration.

PURPOSES OF THE PROPOSED TRANSACTIONS

32. The purpose of the proposed transactions is to restructure the ownership of the assets of the XXXXXXXXXX from their current state to one where Company B owns 100% of the assets of Partnership B and Partnership C and Company C and Company A each own 50% of the assets of Partnership A. The business purpose behind the proposed restructuring is succession planning. Mr. A, is currently involved in Partnership A, Partnership B and Partnership C. Mr. A is approaching retirement age and wishes to reduce his involvement in the business without curtailing it completely. As a result, Mr. A plans to run the business of Partnership A together with Mr. C. Mr. B will run the business of Partnership B and Partnership C.

RULINGS GIVEN

Provided that the statement of facts, the proposed transactions and the purposes thereof, all as described herein, are accurate and constitute complete disclosure of all of the representations, relevant facts, proposed transactions and the purposes thereof, and all of the proposed transactions are carried out as described above, our rulings are as set forth below:

A. Subparagraphs 53(1)(e)(i) and 53(2)(c)(i) of the Act, as the case may be, will be applied to a partner of Partnership A so that, for the purposes of determining the ACB of a partner's interest in Partnership A immediately before the winding up of Partnership A within the meaning of subsection 98(3) of the Act, any portion of Partnership A's income or loss for tax purposes for the fiscal period of Partnership A ending immediately before its winding-up that is allocated to that partner in respect of the Termination Year will be included in calculating that partner's ACB of his or her interest in Partnership A immediately before the winding up of Partnership A (other than for the purposes of calculating a partner's ACB of his or her interest in Partnership A for the purposes of paragraph 96(2.2)(a) of the Act).

B. Subparagraphs 53(1)(e)(i) and 53(2)(c)(i) of the Act, as the case may be, will be applied to a partner of Partnership B so that, for the purposes of determining the ACB of a partner's interest in Partnership B immediately before the winding up of Partnership B within the meaning of subsection 98(3) of the Act, any portion of Partnership B's income or loss for tax purposes for the fiscal period of Partnership B ending immediately before its winding-up that is allocated to that partner in respect of the Termination Year will be included in calculating that partner's ACB of his or her interest in Partnership B immediately before the winding up of Partnership B (other than for the purposes of calculating a partner's ACB of his or her interest in Partnership B for the purposes of paragraph 96(2.2)(a) of the Act).

C. Subparagraphs 53(1)(e)(i) and 53(2)(c)(i) of the Act, as the case may be, will be applied to a partner of Partnership C so that, for the purposes of determining the ACB of a partner's interest in Partnership C immediately before the winding up of Partnership C within the meaning of subsection 98(3) of the Act, any portion of Partnership C's income or loss for tax purposes for the fiscal period of Partnership C ending immediately before its winding-up that is allocated to that partner in respect of the Termination Year will be included in calculating that partner's ACB of his or her interest in Partnership C immediately before the winding up of Partnership C (other than for the purposes of calculating a partner's ACB of his or her interest in Partnership C for the purposes of paragraph 96(2.2)(a) of the Act).

D. Subparagraphs 53(1)(e)(i) and 53(2)(c)(i) of the Act, as the case may be, will be applied to a partner of Partnership D so that, for the purposes of determining the ACB of a partner's interest in Partnership D immediately before the winding up of Partnership D within the meaning of subsection 98(3) of the Act, any portion of Partnership D's income or loss for tax purposes for the fiscal period of Partnership D ending immediately before its winding-up that is allocated to that partner in respect of the Termination Year will be included in calculating that partner's ACB of his or her interest in Partnership D immediately before the winding up of Partnership D (other than for the purposes of calculating a partner's ACB of his or her interest in Partnership A for the purposes of paragraph 96(2.2)(a) of the Act).

E. Subsection 1101(1) of the Regulations will not apply on the dissolution of Partnership A, Partnership B, Partnership C, or Partnership D.

F. For the purposes of subsection 14(1) of the Act, an amount required to be deducted from or added to the cumulative eligible capital of Company A, Company B and Company C as a result of the disposition of assets described in paragraphs 26 to 31 above will be in respect of the same business of Company A, Company B and Company C, respectively.

G. Subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

CAVEAT

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 (the "Circular") issued by the CCRA on May 17, 2002, and are binding provided that all of the proposed transactions have been completed 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 to the Act.

Nothing in this letter should be construed as implying that the CCRA has agreed to or accepted:

(a) the GST implications of any of the proposed transactions;

(b) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch