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.
Principal Issues: Whether subsection 98(6) applies in various scenarios
Position: Depends
Reasons: Various
XXXXXXXXXX 2005-012677
S. Chua
September 9, 2005
Dear XXXXXXXXXX:
Re: Application of subsection 98(6)
This is in reply to your letter of April 18, 2005 wherein you requested a technical interpretation with respect to subsection 98(6) of the Income Tax Act (the "Act"). In your letter, several hypothetical situations were provided and you say that in every one of those situations, all of the property of the predecessor partnership other than property necessary to "pay out" the retiring partner, ultimately ended up in the new partnership.
As noted in Information Circular 70-6R5 issued on May 17, 2002, we do not provide opinions in respect of actual proposed transactions otherwise than as a reply to an advance income tax ruling request. We note that your hypothetical situations involve numerous issues which would necessitate a review of all the pertinent facts, provincial law and supporting documentation that includes the partnership agreement. Consequently, we can provide only the following general comments with respect to the foregoing issues.
For subsection 98(6) to apply, inter alia, the partnership must have ceased to exist. This may occur by operation of provincial statute governing partnership law, under the terms of the partnership agreement or by an order of court. Ordinarily, the partnership agreement will provide for the continuation of the partnership in spite of the occurrence of certain situations. Therefore, in many situations, subsection 98(6) does not apply because the partnership would not have ceased to exist.
When a partnership ceases to exist, partnership law provides for the application of partnership property vis-à-vis the partnership's creditors and for each partner as against the other partners. If subsection 98(6) applies, the fiction for tax purposes is the partnership continues to exist. Therefore, the words in subsection 98(6) regarding the transfer of all of the predecessor partnership's property can only be satisfied if the fictional transfer happened at the same time as the cessation. If the outgoing partner was provided with his share of the partnership property before the partnership ceases to exist, as contemplated by the words "at or before that time" in subsection 98(6), administratively, Canada Revenue Agency would consider the words "all of the property", satisfied if all of the property of the old partnership was directly transferred by the predecessor partnership to the new partnership immediately after the settlement of the outgoing partner's interest.
We hope the above comments have been helpful.
Yours truly,
S. Chua
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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