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) Can a partnership transfer property to a corporation under subsection 85(2) without any tax consequences where the non-share consideration is in excess of the elected amount? (2) Where subsection 85(3) is applicable, does the wind-up of the partnership result in a disposition of the partnership interest? If yes, what are the tax consequences where a general partner has a negative adjusted cost base?
Position: (1) No. (2) Yes, the wind-up would result in a disposition of the partnership interest and a general partner with a negative adjusted cost base would have a gain pursuant to subsection 100(2).
Reasons: (1) Subject to paragraph 85(1)(c), paragraph 85(1)(b) provides that the elected amount cannot be less than boot. (2) The definition of "disposition" under subsection 248(1) includes any transaction or event entitling a taxpayer to proceeds of disposition of the property and paragraph 85(3)(g) deems the amount of the proceeds of disposition where subsection 85(3) is applicable. Further, paragraph 85(3)(g) specifically refers to "the disposition of the interest". Thus, subsection 100(2) would apply.
XXXXXXXXXX
2013-050183
Tim Hum
December 20, 2013
Dear XXXXXXXXXX:
Re: Subsections 85(2), (3) and 100(2)
This is in response to your e-mail of August 15, 2013, concerning the application of subsections 85(2) and (3) of the Income Tax Act (the "Act"). We also acknowledge our telephone discussion of August 19, 2013 (Hum/XXXXXXXXXX), as well as the subsequent e-mail communications. You are enquiring whether or not a general partnership can transfer goodwill pursuant to subsection 85(2) to a taxable Canadian corporation without any tax consequences where the non-share consideration is in excess of the agreed upon amount. In addition, where subsection 85(3) is applicable, you ask if the wind-up of the general partnership results in a disposition of the partnership interest and, if yes, you wonder as to the tax consequences if a partner has a negative adjusted cost base ("ACB") in respect of the partnership interest.
You provide a hypothetical situation where a general partnership is proposing to transfer its goodwill to a taxable Canadian corporation ("Corp") on a tax-deferred basis under subsection 85(2) in return for consideration that includes shares of Corp. You state that the goodwill has not been purchased by the partnership, has a nil tax basis and the elected amount being considered for the goodwill is $1. In addition, you state that the Corp would assume all the partnership debt and the fair market value of the goodwill is greater than the fair market value of that debt. You wonder whether or not the partnership can transfer the goodwill to Corp under subsection 85(2) at an elected amount of $1 without any tax consequences. In addition, you state that subsequently the partnership would be wound-up so that subsection 85(3) would apply and you wonder as to the tax consequences if a partner has a negative ACB.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Our Comments
In general, subsection 85(2) is an elective provision that allows for the rollover of property from a partnership to a taxable Canadian corporation, if certain conditions are met. A joint election in prescribed form and within the time referred to in subsection 85(6) of the Act must be filed by the corporation and all the members of the partnership. Where all the conditions in subsection 85(2) are met, the rules in paragraphs 85(1)(a) to (i) of the Act are applicable, with such modifications as the circumstances require. We refer you to IT-291R3, Transfer of Property to a Corporation Under Subsection 85(1), which discusses the rollover provisions of the Act under which a taxpayer may elect to transfer eligible property to a taxable Canadian corporation in exchange for consideration that includes shares of the corporation. In the situation described, the goodwill would be eligible property pursuant to paragraph 85(1.1)(e) of the Act. The assumption of the partnership debt by Corp would be considered non-share consideration received by the partnership. As noted in paragraph 10 of IT-291R3, pursuant to paragraph 85(1)(b), the agreed amount generally cannot be less than the fair market value of the non-share consideration received. Therefore, in the situation described, the elected amount for the goodwill cannot be $1 and will be deemed to be an amount equal to the fair market value of the assumed debt.
Where other assets are also being transferred, we refer you to the comments in paragraph 17 of IT-291R3 which include the following:
Paragraph 85(1)(b), however, will not apply where the fair market value of the non-share consideration given (including the assumption of debt by the transferee) is allocated among several properties transferred and retained by the transferee and the amount allocated to each asset is not greater than the agreed amount in respect of each asset.
Under subsection 248(1) of the Act, "disposition" is defined to include any transaction or event entitling a taxpayer to proceeds of disposition of the property. In the case where subsection 85(3) applies, paragraph 85(3)(g) deems the amount of the proceeds of disposition. Further, paragraph 85(3)(g) specifically refers to "the disposition of the interest". Accordingly, it is our view that the wind-up of the partnership does result in a disposition of the partnership interest. Therefore, for those partners that have a negative ACB, subsection 100(2) of the Act would be applicable such that the negative ACB would be added to the amount, if any, determined under subsection 40(1) of the Act which provides the normal rules for computing the gain from the disposition of the partnership interest.
We trust the above comments will be of assistance.
Yours truly,
Chrys Tzortzis, CPA, CA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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