Principal Issues: Whether, in a particular situation where corporations would own undivided interests in shares of public corporations and in an interest in a mutual fund trust following the dissolution of a partnership, it would be possible to partition such properties without attracting adverse tax consequences.
Position: Subsection 98(3) would require each partner to receive an undivided interest in each property distributed on the dissolution of the partnership, and would not permit a partner to receive a whole investment or a divided interest in such property on the distribution. If the particular situation would involve exchanges or transfers of rights or interests in the investments between the corporations, such exchanges or transfers would constitute a disposition for tax purposes.
The application of subsections 248(20) and (21) with respect to the shares would depend, among other things, on whether it would be legally possible to effect a partition of each share because each such share constitutes a separate property. If a corporation can legally issue fractional shares and if the partition of a share gives rise to the issuance of fractional shares, all of such fractional shares would be considered to represent the same property as the share being partitioned and each person would be considered to have a new interest in such a share. Consequently, subsection 248(21) may apply to the partition of a share in such circumstances. If subsection 248(21) does not apply, the partition of the share may not necessarily attract adverse tax consequences pursuant to subsection 248(20). In the circumstances, the Directorate is not prepared to provide an opinion on the possibility of partitioning a share without issuing fractional shares, but would be prepared to consider this question in the context of an Advance Income Tax Ruling.
With respect to the application of subsections 248(20) and (21), an interest in a trust constitutes one property, even if described by reference to units. Consequently, if it is legally possible to effect a partition of an interest in a trust owned by two or more persons and if each person's respective undivided interest in such an interest becomes a divided interest in the said interest, the Rulings Directorate would generally consider that subsection 248(21) may apply to such partition if the fair market value test in subsection 248(21) is met. If subsection 248(21) does not apply, the partition of an interest in a trust may not necessarily attract adverse tax consequences pursuant to subsection 248(20).
Potential application of GAAR would have to be considered depending on the situation.
Reasons: Wording of subsections 98(3), 248(20) and 248(21) of the Act. Past positions.