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: 1. Does subsection 98(5) of the Act apply to a wind-up of a partnership in a tiered partnership arrangement?
2. Would subsection 98(5) of the Act apply where, prior to its wind-up, the partnership's only activity was ownership of shares in a corporation?
Position: Insufficient information to conclude. However, based on certain assumptions, it is possible that 98(5) could apply.
Reasons: Our reading of the legislation. Consistent with other positions taken.
2008-027515
XXXXXXXXXX Allan Nelson, CMA
(613) 443-7253
July 9, 2009
Dear XXXXXXXXXX :
Subject: Application of Subsection 98(5)
Technical Interpretation Request
This is in reply to your letter dated April 14, 2008, requesting our views concerning the application of subsection 98(5) of the Income Tax Act (the "Act"). We also acknowledge our various telephone conversations (XXXXXXXXXX /Nelson).
Our Comments
As noted in paragraph 22 of Information Circular 70-6R5, dated May 17, 2002, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than by way of an advance income tax ruling. However, as agreed during our telephone conversation on June 29, 2009, we are able to provide you with general responses to the following amended questions.
Questions
1. Does subsection 98(5) of the Act apply in a wind-up of a partnership (the "top-tier
partnership"), where, prior to its wind-up, the top-tier partnership's only asset was an interest in another general partnership (the "lower-tier partnership")?
2. Would subsection 98(5) of the Act apply where, prior to its wind-up, the top-tier
partnership's only activity was ownership of shares in a corporation ("Opco")?
Our Comments
In responding to your questions, we have made the following assumptions:
- the questions relate to hypothetical scenarios;
- the partnerships in question are valid partnerships. In this regard, reference is made to paragraph 2 of Interpretation Bulletin IT-90, which states "Generally speaking, a partnership is the relation that subsists between persons carrying on business in common with a view to profit..." and
- when the top-tier partnership winds up, one of its partners (the "proprietor") will receive all of the former top-tier partnership's assets as proceeds of disposition for the proprietor's interest in the top-tier partnership. After the wind-up, the proprietor will continue to earn income from each of those assets.
To the extent that these assumptions are not accurate, our responses may differ.
Response to Question 1 - Does subsection 98(5) of the Act apply in a wind-up of the top-tier partnership, where, prior to its wind-up, the top-tier partnership's only asset was an interest in the lower-tier partnership?
In order for subsection 98(5) of the Act to apply to the cessation of a partnership, inter alia, one, but not more than one of the former partners (referred to as the "proprietor") must carry on alone the former partnership's business. We will refer to this as the "business continuity test".
When the top-tier partnership ceases to exist and the proprietor earns income in respect of its newly acquired interest in the lower-tier partnership, it is our view that the proprietor will meet the "business continuity test". This is so, even though the proprietor will not own all of the partnership interests in the lower-tier partnership.
Therefore, assuming the other requirements of subsection 98(5) are met, in our view, the application of 98(5) of the Act is not precluded simply because, prior to ceasing to exist, the top-tier partnership's only asset was an interest in the lower-tier partnership.
Response to Question 2 - Would subsection 98(5) of the Act apply where, prior to its wind-up, a partnership's only activity was ownership of shares in Opco?
When a partnership ceases to exist and the proprietor earns income in respect of its newly acquired Opco shares, it is our view that the proprietor would meet the "business continuity test". Therefore, assuming the other requirements of subsection 98(5) are met, in our view, the application of 98(5) of the Act is not precluded simply because, prior to ceasing to exist, the partnership's only assets were shares of Opco
In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling.
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
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