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: Is it possible to revoke an election made pursuant to subsection 98(3)?
Position: No.
Reasons: Subsection 98(3) of the Act is an elective provision and there is no provision that would allow the election to be revoked.
2005-014198
XXXXXXXXXX Charles Rafuse
613-957-8967
February 14, 2006
Dear XXXXXXXXXX:
Re: Application of Subsection 98(3)
This is in reply to your letters of June 30, August 9, September 20 and November 2, 2005, concerning the application of subsection 98(3) of the Income Tax Act (the "Act") upon the dissolution of a partnership.
You have asked us to consider the following:
1) Taxpayers X and Y were partners with several other practitioners in a XXXXXXXXXX practise (the "Partnership").
2) The other partners had started the practise several years ago, and as such, had not paid an amount to acquire an interest in the Partnership.
3) When X acquired a XXXXXXXXXX% interest in the Partnership, as part of the consideration he paid approximately $XXXXXXXXXX in respect of goodwill associated with the Partnership, which at that time was valued at $XXXXXXXXXX.
4) When Y acquired a XXXXXXXXXX% interest in the Partnership, as part of the consideration he paid approximately $XXXXXXXXXX in respect of goodwill associated with the Partnership, which at that time was valued at $XXXXXXXXXX.
5) In XXXXXXXXXX, because the partners no longer shared common business interests, the Partnership was dissolved to allow the partners to practise independently.
6) Each partner received an undivided share in the Partnership's assets on dissolution, such that each partner's undivided interest in a particular property was equal to that partner's undivided interest in every other property.
7) The partners jointly elected in prescribed form, within the time set out in subsection 96(4) of the Act, to have each partner's proceeds of disposition of their interest in the Partnership and the cost to each partner of the property received on the dissolution determined in accordance with the rules in subsection 98(3) of the Act.
8) The adjusted cost base ("ACB") of X and Y's partnership interest immediately prior to dissolution was $XXXXXXXXXX and $XXXXXXXXXX respectively.
9) Immediately prior to dissolution, the Partnership assets consisted solely of $XXXXXXXXXX of accounts receivable, $XXXXXXXXXX of leasehold improvements and $XXXXXXXXXX of furniture and fixtures for a total of $XXXXXXXXXX.
10) The Partnership did not record any amount of goodwill in its financial statements.
11) Pursuant to subparagraph 98(3)(b)(i) of the Act, the cost to X and Y of their individual interest in the Partnership's assets was equal to their percentage interest in the cost amount of the Partnership assets to the Partnership immediately prior to dissolution.
12) X's percentage interest in the aggregate cost amount to the Partnership of all Partnership property received on dissolution was $XXXXXXXXXX (XXXXXXXXXX% of $XXXXXXXXXX).
13) There is a $XXXXXXXXXX difference between the ACB of X's partnership interest and X's percentage interest in the aggregate cost of the Partnership assets.
14) Y's percentage interest in the aggregate cost amount to the Partnership of all Partnership property received on dissolution was $XXXXXXXXXX (XXXXXXXXXX% of $XXXXXXXXXX).
15) There is a $XXXXXXXXXX difference between the ACB of Y's partnership interest and Y's percentage interest in the aggregate cost of the Partnership assets.
You conclude that the amount paid by X and Y for goodwill will not be reflected in the tax cost of their undivided interest in the Partnership assets going forward.
In your example, certain of the original partners also elected in 1994 to increase the cost base of their partnership interest in the Partnership by up to $100,000, in accordance with subsection 110.6(19) of the Act. You conclude subsection 98(3) limits the ability of these original partners to benefit from this increase in the cost base of their partnership interest on the dissolution of the Partnership.
In view of these concerns, you ask whether the partners may withdraw the subsection 98(3) election.
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving a specific taxpayer other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments.
Pursuant to subsection 98(2) of the Act, property transferred from a partnership to a partner is generally deemed to have been disposed of by the partnership for fair market value proceeds of disposition, and acquired by the partner at a cost equal to that fair market value. Subsection 98(3) of the Act is an elective provision deeming property of a Canadian partnership which has ceased to exist to have been distributed to its members for proceeds to the partnership equal to the cost amount of the property to the partnership, and at a cost to the members based on their respective share of the partnership's cost in the property, if the partners jointly elect that the subsection apply. An election pursuant to subsection 98(3) may be made only if all the property of the partnership has been distributed to the partners and, immediately after the dissolution, each partner holds an undivided interest in each property of the partnership that is equal to the partner's undivided interest in each other property of the partnership.
Although subsection 98(3) is commonly referred to as a "rollover", there may be tax implications to individual partners in making the election. As such, care is needed in determining whether a particular partner would be better off by making the election, or receiving property from the partnership at fair market value. For example, where the adjusted cost base of a partner's interest in the partnership exceeds the partner's interest in the aggregate cost of the partnership property, subparagraph 98(3)(b)(ii) and paragraph 98(3)(c) may permit all or a portion of the "excess" to be designated by the partner as part of the cost to the partner of the undivided interest received from the partnership in non-depreciable capital property. As you have noted, this "bump" to the cost of property is not available in respect of other types of property, such as goodwill. You have also noted that a partner with an exempt capital gains balance consequential to an election made in 1994 pursuant to subsection 110.6(19) of the Act may prefer to receive property from the partnership at fair market value.
We would confirm, in this regard, that there is no authority in either section 98 or subsection 220(3.2) to revoke or amend a valid election made under subsection 98(3).
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Agency.
Yours truly,
Robin Maley
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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