6 August 2008 External T.I. 2007-0251001E5 - Proposed subsection 96(1.01) - amalgamation

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 proposed subsection 96(1.01) would apply where non-related corporate partners amalgamated? If so, how would income be allocated and adjusted cost base adjustments made?

Position: Yes, proposed subsection 96(1.01) would apply. Income allocations and adjusted cost base adjustments would be made under proposed paragraphs 96(1.01)(a) and (b) respectively.

Reasons: Following an amalgamation, three unrelated predecessor corporations ceased to be members of a partnership.

XXXXXXXXXX 								2007-025100
									André Gallant
(613) 957-8961
August 6, 2008

Dear XXXXXXXXXX :

Re: Proposed subsection 96(1.01) - Amalgamation

This is in response to your letter of August 27, 2007, and is further to the telephone conversation (Gallant/XXXXXXXXXX ), regarding the application of proposed subsection 96(1.01) of the Income Tax Act (the "Act") to an amalgamation of some of the corporate members of a partnership.

Our understanding of the hypothetical situation is as follows. On August 31, X8, three out of four corporate partners wish to amalgamate. Each member currently holds a 25% interest in the partnership, which has a December 31 year-end. The four corporate partners are unrelated to each other. As a result of drawings since January 1, X8, each corporate partner has a negative adjusted cost base (ACB) for its partnership interest, as income is not allocable to it until the partnership year-end of December 31, X8.

You asked whether the three corporate partners could be considered to have ceased to be members of the partnership at the time of the amalgamation because of subsection 100(2.1) of the Act, and if so, whether proposed subsection 96(1.01) would then become applicable.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following comments.

In the hypothetical situation you described, it is our view that subsection 100(2.1) of the Act would apply because none of the predecessor corporations are related to each other and an interest in the partnership owned by each of the three predecessor corporations has become property of the amalgamated corporation (Amalco). Accordingly, each predecessor corporation would be deemed to have disposed of the interest in the partnership to Amalco immediately before the amalgamation for proceeds of disposition equal to the adjusted cost base to the predecessor corporation of the interest in the partnership at the time of the disposition and the new corporation would be deemed to have acquired the interest in the partnership from the predecessor corporation immediately after that time at a cost equal to the proceeds of disposition. While the matter is not free from doubt, the better view is that, by reason of the operation of subsection 100(2.1), since each predecessor corporation is deemed to have disposed of the interest in the partnership, each predecessor corporation would have ceased to be a member of the partnership for purposes of the preamble in proposed subsection 96(1.01).

For the purpose of allocating partnership income or loss for the partial year just prior to the amalgamation date, proposed paragraph 96(1.01)(a) deems the "former partner" to be a member of the "former partnership" at the end of the normal fiscal period of that partnership. The primary purpose for this addition was to provide clarification as to the tax treatment of partial and/or final year's income of the former partner. This proposed amendment is effective for 1995 and subsequent taxation years. It is the Canada Revenue Agency's longstanding practice to ask taxpayers to file on the basis of proposed legislation. Taxpayers that choose to file based on the wording of the existing law rather than the wording of the existing legislative proposals are expected to bring their tax affairs up-to-date, in a timely manner, once the legislative proposals become law.

Proposed paragraph 96(1.01)(a) does not generally require that partnership income or loss be calculated immediately after a member leaves the partnership. The income or loss allocation, including that of the former member, continues to be calculated after the end of the partnership's fiscal period.

Proposed subparagraph 96(1.01)(b)(ii) essentially provides that, for the purpose of subparagraph 53(1)(e)(i), the fiscal period of the partnership is deemed to end immediately before the application of subsection 100(2.1), this latter provision applying immediately before the amalgamation. In other words, the partnership's fiscal period is deemed to end "immediately before the time that is immediately before the time [at which time subsection 100(2.1) applies] that the taxpayer ceased to be a member of the partnership [the taxpayer having ceased to be a member of the partnership on amalgamation]".

We hope that our comments will be of assistance to you.

Yours truly,

G. Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch