31 August 1990 Ruling 59691 F - Continuation of a Partnership

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:

Re:  Continuation of a Partnership

We are writing in reply to your letter of February 28, 1990 wherein you requested our views on whether certain changes to a partnership would result in a disposition and reacquisition of the partnership interests by the partners.  We apologize for the delay in responding to your request.

You have described the following situation:

1.     A general partnership formed under the laws of the province of Alberta, comprised of two Canadian corporations, owns and manages certain Canadian real estate.

2.     The partnership is desirous of admitting as partners individuals who are residents of the United States (the "Investors").

3.     The Investors require that the partnership become a limited partnership governed by the laws of one of the states of the United States of America.

4.     The business of the partnership will remain that of dealing  with the Canadian real estate previously owned by the partnership and additional Canadian real estate acquired from the Investor's contributions.

5.      One or both of the present partners in the partnership will become general partners and the Investors will become limited partners.

In particular, you have requested our views as to whether the admission of new partners into a partnership or a change in the governing law of the partnership will result in a dissolution of the partnership and a deemed disposition of the partnership interests by the partners.

Your query seems to relate to a proposed transaction involving specific taxpayers.  As indicated in paragraph 23 of Information Circular 70-6R dated December 18, 1978, the Department is not prepared to provide written opinions on proposed transactions.  Nevertheless, we are prepared to provide the following general comments.

According to paragraph 2 of Interpretation Bulletin IT-338R, the admission of a new partner may, as a consequence of the application of provincial law or the partnership agreement, result in the formation of a new partnership.  In such a case, each existing partner will be deemed to have disposed of his partnership interest in the old partnership and to have acquired a partnership interest in the new partnership.  Even where the applicable provincial law and the partnership agreement provide for the continuation of an existing partnership on the admission of a new partner, whether the admission of the new partner results in the disposition of partnership interests by the existing partners is a question of fact.  The decision in the case of Stursberg et al v. MNR 90 DTC 1159 supports the determination that a disposition may occur.

In general, the conversion of a general partnership to a limited partnership does not result in a disposition of the partnership interests of the general partners who become limited partners provided:

i)     there has been no significant change in the rights and obligations of the partners other that the decrease in the potential liability of the general partners who become limited partners and the increase in the potential liability of the general partners who remain as such; and

ii)     the law governing the partnership does not operate to cause a dissolution of the general partnership, when there is a conversion to a limited partnership.

Significant changes in any of the following areas upon conversion to a limited partnership may result in a disposition of the partnership interests:

i)     the contributed capital accounts of any of the partners;

ii)     the percentage interest in the partnership of any of the  partners;

iii)     the number or identity of the partners;

iv)     the business of the partnership; or

v)     the percentage interest of each partner in the profits; or

vi)     the percentage liability for losses of each partner, except for the limitation on liability of the limited partners.

In addition to the above, we would need to determine whether the applicable provincial law resulted in dissolution upon the continuation of the partnership in a foreign jurisdiction.

While the question of liability for income taxes in Canada is governed by the Canadian Income Tax Act (the "Act"), we would have to look to the applicable U.S. state law to determine whether conversion from a general partnership to a limited partnership dissolves the general partnership.  If there is a dissolution, this would provide strong support for finding that a disposition of a partner's general partnership interest under subsection 54(c) of the Act had occurred.  With respect to U.S. tax law, according to U.S. Revenue Ruling 84-52 the conversion of a general partnership interest into a limited partnership interest in the same partnership is not treated as a sale or exchange, and the general partnership is not terminated as a result of the conversion.  We would have to review this U.S. Ruling to determine its implications, if any, for Canadian income tax purposes.

These comments represent our opinion of the law as it applies generally.  As indicated in paragraph 24 of Information Circular 70-6A this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.

We trust that these comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch