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: Subsection 98(5) of the Income Tax Act.
This is in reply to your letter of April 8, 1991 concerning the interpretation of subsection 98(5) of the Income Tax Act (the "Act").
Your letter poses the following questions:
Questions:
1. Subsection 98(5) of the Act requires that a partnership carries on a business. In the case of a partnership that owns and operates a "passive" rental property, the income of the partnership is considered to be "income from property" for the purposes of the Act. Assuming that all of a partnership's income is income from property for tax purposes can subsection 98(5) be used to transfer the property to one of the partners?
2. Subsection 98(5) of the Act requires that property received from the partnership be used in the business of the partner who receives such property. Will a passive rental property be considered to be used in the business of a sole proprietor? Assuming the sole proprietor is a principal business corporation whose income is considered to be income from property or income from a "specified investment business" would such a corporation be viewed as continuing to use the rental property in the course of a business?
3. Subsection 98(5) requires that the partnership property be "received" by the sole proprietor. Does the Department expect a legal conveyance of the assets of the partnership to the partner who becomes the sole proprietor? You note that in a limited partnership the general partner will often hold title to the property as bare trustee or nominee for the limited partnership. Specifically, suppose that a limited partnership ceases as a result of the general partner resigning its partnership interest. The general partner continues to hold title to the former partnership property as bare trustee or nominee for the sole limited partner who has become the sole proprietor. In such a case, would the subsection 98(5) rollover be denied solely because a legal conveyance was not executed?
4. A limited partnership consists of a corporate general partner and a corporate limited partner both of which are wholly owned by the same individual. The two corporations are amalgamated causing the partnership to cease to exist although the partnership business is carried on by the amalgamated corporation. Would the provisions of subsection 98(5) be available? In similar circumstances would the provisions of subsection 85(2) be available?
5. Subparagraph 98(5)(a)(i) of the Act refers to the adjusted cost base to the proprietor of the interest in the partnership immediately before the particular time. The particular time is the time at which the partnership ceases to exist at which time there is a termination of the partnership's fiscal year end. The share of income of the partnership is added to the adjusted cost base of the partnership interest immediately after the fiscal year end of the partnership [subparagraph 53(1)(e)(i)]. Since the partnership ceases to exist at the year end, is the partner's share of the partnership income for the last fiscal period added to the sole proprietors adjusted cost base of the partnership interest for purposes of the calculation under paragraph 98(5)(a) of the Act? If this adjustment is not made is there a reason for it?
6. If a partner makes a loan to the partnership and subsequently that partner becomes the sole proprietor under subsection 98(5) of the Act. Assuming that loan liability is extinguished as a result of the rollover under subsection 98(5), will section 80 of the Act be applicable?
7. It appears that property transferred to the proprietor under subsection 98(5) of the Act is subject to the half year rule under subsection 1100(2) of the Income Tax Regulations (the "Regulations"). Paragraph 1100(2.2)(e) of the Regulations refers to the acquisition by a taxpayer from a person with whom the taxpayer was not dealing at arm's length at the time the property was acquired. Does the word "person" in paragraph 1100(2.2)(e) include a partnership? Assuming the limited partner is dealing at arm's length with the general partner, does the fact that the limited partner is a majority interest partner make the transaction a non arm's length transaction for the purposes of subsection 98(5) of the Act?
Our Comments:
The following comments are based on the assumption that none of the transactions involved are subject to any of the avoidance provisions of the Act. The determination of whether or not such provisions are applicable is based on the specific facts and circumstances of an actual case.
Our comments respond to the questions in the order set out above.
1. In order for subsection 98(5) to apply it is necessary that the partner who becomes the sole proprietor must continue to use any property received in the course of the "business" previously carried on by the partnership. Where the property received is a passive rental property, and the recipient continues to use it in the same manner as the partnership, we consider that the "business" of the partnership is carried on for the purposes of subsection 98(5) of the Act and the rollover is available. However, this does not change the nature of the income in the recipient's hands. Such income is usually income from property for the purposes of other provisions of the Act.
2. The answer to this question is the same as in 1 above.
3. Usually, where a bare trustee or nominee is involved and the beneficial owner can be identified, the Department accepts the beneficial owner of the property as the owner for tax purposes and a legal conveyance may not be necessary. However, when a partnership ceases it would seem that, as a minimum, there should be documentation showing that the former general partner is now the bare trustee or nominee of the partner who is alleged to be the beneficial owner of the partnership property. You may also wish to refer to the Department's interpretations expressed in IT-437, Ownership of Dwelling Property.
4. Subsection 98(5) of the Act is not applicable to this situation involving the amalgamation of the general and limited partners. Subsection 98(2) of the Act applies to deem the property of the partnership to be disposed of for proceeds of disposition equal to the fair market value of the property and each corporation to have acquired the property at such fair market value. Each of the corporations would be considered to have disposed of their partnership interests at the fair market value thereof. The application of subsection 98(2) might be avoided by dissolving the partnership prior to the amalgamation in such a manner that the provisions of subsection 98(3) of the Act apply.
We agree with the comments in your letter that subsection 85(2) of the Act is not available since shares are not received by the partnership.
5. Both the determination of the adjusted cost base of the partnership interest and the last fiscal period of the partnership are considered to take place immediately before the cessation of the partnership. Consequently, the earnings for the last fiscal period are added to the adjusted cost base of the partnership interest under paragraph 53(1)(e) of the Act. In other words it can be assumed that the fiscal period ends before the determination of the adjusted cost base, although both times are immediately before the cessation of the partnership.
6. Section 80 of the Act would not apply in any situation where the net assets of the partnership received by the partner under subsection 98(5) of the Act are sufficient to satisfy the principal amount of the loan. We assume, also, that the former partner does not claim any loss for this loan.
7. When there is a rollover to a former partner under the provisions of subsection 98(5) of the Act the partnership is considered to be a person for the purposes of subsection 1100(2.2) of the Regulations. Since there is no specific provisions in the Act establishing either an arm's length or non arm's length relationship between a partner and partnership, it must be emphasized that this determination is based on the specific facts and it cannot be automatically assumed that any partner, whether a major or minor partner deals at non arm's length with the partnership (see paragraphs 15 and 16 of IT-419 which comment on this issue). Where the transaction is considered to be at non arm's length the provisions of subsection 1100(2.2) of the Regulations may be available.
We trust these comments will be of assistance.
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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