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.
Dear Sirs:
We are writing in response to your letter of August 21, 1989 wherein you requested our comments on your interpretation of the application of certain provisions of the Act in the two hypothetical situations outlined below.
Situation 1
Company A carries on an active business with Company B through a partnership (the “Partnership”). Both Company A and Company B are Canadian resident corporations, are taxable Canadian corporations, within meaning of paragraph 89(1)(i) of the Act, and all of their business activities carried on through the Partnership are conducted solely in Canada. Company A and Company B would like to merge their operations by way of an amalgamation pursuant to the provisions of subsection 87(1) of the Act.
It is your view that the Partnership would cease to exist at the time of the amalgamation. Accordingly, pursuant to subsection 98(2) of the Act, the Partnership will be deemed to have disposed of all of its assets to its former partners for proceeds of disposition equal to the fair market value thereof. It is also your view that neither subsection 98(3) nor subsection 98(5) of the Act would apply to this situation in the circumstances described.
We agree with your view that subsections 98(3) end 98(5) of the Act would not apply and that subsection 98(2) of the Act would apply to deem the Partnership to have disposed of the property of the partnership for proceeds of disposition equal to the fair market value thereof and to deem Company A and Company B to have acquired the property at an amount equal to that fair market value. It is also our view that Company A and Company B would be deemed to have disposed of their partnership interests at fair market value.
Situation 2
The facts are the same as if in Situation 1 except that prior to the amalgamation, Company A transfers its interest in the Partnership to Company B pursuant to subsection 85(1) of the Act in exchange for shares of Company B having a fair market value equal to the fair market value of its partnership interest transferred.
It is your view that subsection 98(5) of the Act would apply to permit a tax free liquidation of the partnership notwithstanding that shortly after the disposition of Company A's partnership interest, Company A and Company B would be amalgamated.
If Company A transfers its partnership interest to Company B prior to the amalgamation such that all of the requirements specified in the preamble of subsection 85(1) of the Act are met, we agree with your view that that subsection would apply. However, we do not concur with your view that subsection 98(5) of the Act would apply if, shortly after the subsection 85(1) transaction, Company A and Company 6 would be amalgamated. For subsection 98(5) of the Act to apply, in our view, it would be necessary for Company B to carry on by itself the business that was the business of the partnership and to continue to use, in the course of the business; any property that was, immediately before the subsection 85(1) transaction, partnership property. In the circumstances described herein, this would clearly not be the case. Thus, we are of the view that subsection 98(2) would also apply to the second situation.
Other Comments
In our opinion, the application of subsection 98(2) of the Act to both of the above situations could be avoided by having Company A and Company B dissolve the Partnership such that the provisions of subsection 98(3) of the Act would apply, assuming of course, that each of Company A and Company B would jointly elect under the subsection. The subsequent amalgamation of Company A and Company 6 pursuant to subsection 87(1) of the Act would then not result in the application of subsection 98(2) of the Act.
The above are our general Comments, which may not be applicable to a specific situation as the facts of a particular situation may be different. In accordance with the guidelines explained in paragraph 24 of Information Circular 70-6R dated December 18, 1978, the above comments do not constitute advance income tax rulings and consequently are not binding on the Department,
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© Her Majesty the Queen in Right of Canada, 1989
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© Sa Majesté la Reine du Chef du Canada, 1989
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