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) Whether paragraph 55(3)(a) applies to a divisive reorganization (“Reorganization”) undertaken and completed by common-law partners at a time when they had ceased cohabiting for less than 90 days due to a breakdown of their conjugal relationship
Position: (1) Yes
March 29, 2021
Re: Common law partnership – Paragraph 55(3)(a)
This is in reply to your email dated February 7, 2020 (“Request”) in which you requested our comments with respect to the application of paragraph 55(3)(a) of the Income Tax Act (“Act”) in the context of the breakdown of a taxpayer’s common-law partnership with another person.
In your Request, you have expressed concerns that the tax consequences that are determined on the basis of a common-law partnership determination that is made at a particular time may be retroactively changed if the taxpayer and the person remain separate and apart for more than 90 days after they have ceased cohabiting because of the breakdown of their conjugal relationship.
Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.
For clarity purposes, the hypothetical facts that we considered to address the issues raised in your Request are as follows:
1. A and B have been cohabiting in a conjugal relationship for 10 years (“Conjugal Relationship”).
2. Each of A and B owns 50% of the common shares in an operating corporation (“Opco”), which owns business property (“Business Property”).
3. On January 1 of Year 11, A and B started to live apart as a result of a breakdown of their Conjugal Relationship.
4. On January 2 of Year 11, A and B initiated a divisive reorganization (“Reorganization”) in the course of which the following transactions were undertaken:
a) B incorporated a new corporation (“Newco”).
b) B disposed of her Opco common shares to Newco in consideration for common shares in Newco.
c) Opco disposed of a portion of the Business Property to Newco in consideration for preferred shares in Newco.
d) The shares that Opco and Newco held into one another were cross-redeemed in consideration for the issuance of a non-interest bearing promissory notes (“Notes”), and
e) The Notes will be extinguished by way of legal set-off.
5. All the transactions undertaken in the course of the Reorganization that may be subject to the tainting events described in subparagraphs 55(3)(a)(i) to (v) (“Tainting Events”) occurred on March 26 of Year 11.
6. Therefore, the Reorganization was completed 85 days after A and B started to live separate and apart because of the breakdown of their Conjugal Relationship.
7. The dividends that are deemed to be paid and received by Opco and Newco in the course of the Reorganization would be subject to subsection 55(2) if the exception found in paragraph 55(3)(a) does not apply to any of the transactions or events completed in the course of the Reorganization.
8. On April 2 of Year 11, A and B still had not resumed their Conjugal Relationship with no intention to reconcile in the foreseeable future.
For the purposes of paragraph 55(3)(a), whether A and B will be related to one another pursuant to paragraph 251(2)(a) immediately before the occurrence of any of the Tainting Events.
Whether the application of paragraph 55(3)(a) exception will be compromised if A and B remain separate and apart for more than 90 days after they ceased cohabiting because of the breakdown of their Conjugal Relationship.
The applicable law
According to paragraph 55(3)(a), we have to determine whether A and B are related immediately before the occurrence of any of the Tainting Events. In that regard, individuals connected by common-law partnership are related to each other pursuant to paragraph 251(2)(a). In addition, paragraph 251(6)(b.1) provides that, for the purposes of the Act, persons are connected by common-law partnership if one is in a common-law partnership with the other.
The term common-law partnership is defined in subsection 248(1) as the relationship between two persons who are common-law partners of each other.
The term common-law partner is defined in subsection 248(1) as follows:
“Common-law partner with respect to a taxpayer at any time, means a person who cohabits at that time in a conjugal relationship with the taxpayer and
a) has so cohabited throughout the 12-month period that end at that time, or […]
and, for the purpose of this definition, where at any time the taxpayer and the person cohabit in a conjugal relationship, they are at any particular time after that time deemed to be cohabiting in a conjugal relationship unless they were living separate and apart at the particular time for a period of at least 90 days that includes the particular time because of a breakdown of their conjugal relationship.”
Common-law partnership determination
For the purposes of paragraph 55(3)(a), a common-law partnership determination (“Determination”) has to be made immediately before the time when one of the Tainting Events occurs (“Determination Time”).
In making a Determination, the starting point is to establish whether the taxpayer and the person had been cohabiting in a conjugal partnership for a period of 12 consecutive months at the Determination Time.
Where the taxpayer and the person are no longer cohabiting at the Determination Time, the post-amble to the “common-law partner” definition in subsection 248(1) may assist in determining whether they continued or ceased to cohabit in a conjugal relationship at that time. More particularly, a taxpayer and a person who cohabit, at any time, in a conjugal relationship are deemed to be cohabiting in a conjugal relationship at any particular time after that time unless they were living separate and apart at the particular time for a period of more than 90 days because of a breakdown of their conjugal relationship.
Because A and B had ceased cohabiting for less than 90 days on the occurrence of any of the Tainting Events, they will be common-law partners prior to the completion of the Reorganization. Accordingly, the dividends received by the Newco and Opco will not be subject to subsection 55(2) because A will be related to B pursuant to paragraph 251(2)(a) on the Determination Time.
The application of paragraph 55(3)(a) will not be retroactively changed if A and B remain separate and apart for more than 90 days after they ceased cohabiting because of the breakdown of their conjugal relationship.
We trust that the above comments will be of assistance.
Urszula Chalupa, LL.B, M. Fisc.
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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