31 January 1994 External T.I. 9328595 F - Wind-Up 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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Partnership Year Ends

This is in reply to your letter dated October 4, 1993 wherein you requested an interpretation concerning the wind-up of a partnership. More specifically, you would like to obtain our opinion regarding the application of the rollover provision provided by subsection 98(3) of the Income Tax Act (the "Act") and the election under subsection 99(2) of the Act which permits postponement of income inclusion. We apologize for the delay in responding to your request.

As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents.

Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate taxation district office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Subsection 98(3) of the Act is an elective provision permitting, provided that certain conditions are met, a Canadian partnership which has ceased to exist to dispose of its properties in favour of its members for proceeds equal to the cost amount of the property distributed. Two of the conditions required by subsection 98(3) of the Act, are firstly that the partnership must distribute all its properties and secondly, each partner must receive an undivided interest in each property owned by the partnership. Consequently, it is our opinion that the conditions of subsection 98(3) are not met when each partner receives whole property instead of an undivided interest in the property, even if such distribution is established by the partnership agreement.

However, where a Canadian partnership has ceased to exist and within three months after that time one of the partners continues the partnership business as a sole proprietor and continues to use in the business any of the partnership property, subsection 98(5) of the Act applies. Subsection 98(5) of the Act provides, among other things, a rollover of the partnership's properties in favour of the sole proprietor and a disposition of the sole proprietor's partnership interest. It is to be noted that the partner who continues as a sole proprietor might recognize a gain on the disposition of his interest if the cost amount of the properties received from the partnership exceeds the adjusted cost base of his interest. When calculating the gain resulting from the disposition of his partnership interest, the sole proprietor is deemed to add any amount paid, if any, to the other partners for their partnership interests.

Whether a partnership in the process of dissolution has ceased to exist, either by operation of law or by consent of the partners, is a question of fact. Ordinarily, a partnership ceases to exist when it is dissolved. Paragraph 98(1)(a) of the Act provides that for income tax purposes, a partner will be deemed not to have disposed of the partnership interest until the partnership has ceased to exist and all of the partnership property and any property substituted therefor has been distributed to the persons entitled by law to receive it. If a partnership ceases to exist and its property is not distributed at that time, subsection 98(1) will deem the partnership not to have ceased to exist until such time as all of the partnership property has been distributed. In such a case, subsection 99(1) of the Act, unless an election is made under subsection 99(2) of the Act, will apply to deem the partnership's fiscal period to have ended immediately before that time and subsequently, on the distribution of the property of the partnership there will be another fiscal period termination.

An individual who is a Canadian resident and was a member of a partnership that actually ceased to exist may elect under subsection 99(2) of the Act, for the purposes of computing his income, to treat the fiscal period of the partnership as ending at the time when it normally would have done so had the partnership not actually ceased to exist. In our opinion, an election under subsection 99(2) of the Act is not invalid because of the fact that subsection 98(5) of the Act applies.

As mentioned in Interpretation Bulletin IT-358 paragraph 8, there is no prescribed form for making the election under subsection 99(2) of the Act. The Department considers that the individual partner makes the election when he files an income tax return on which the income of what otherwise would be the second fiscal period in that year is omitted and a note to the effect that the election is being made is included with the return.

The above comments are an expression of opinion only and, as explained in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

We trust that these comments will be of assistance to you.

Yours truly,

for Acting DirectorManufacturing Industries, Partnerships and Trusts Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch