10 January 1982 Income Tax Severed Letter RCT 85-279 F

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:

This is in reply to your letter of December 1, 1981 in which you requested our opinion on the interpretation of subsections 99(1), 99(2), and 85(3) of the Income Tax Act (the Act).

The first question you raise is in regard to the interpretation of subsection 99(1) of the Act. You have stated that it is your understanding that under provincial law a partnership ceases to exist when it transfers its business to a corporation. Therefore, in your opinion, under subsection 99(1), the partnership will cease to exist when it transfers its business to a corporation and as a result, it will have a year end immediately before the effective time of transfer. You further state that since the partnership had a fiscal period ending immediately before the effective date of transfer of depreciable assets, there will be a U.C.C. balance at the year end and the partnership will be eligible to claim capital cost allowance in accordance with Regulation 1100. It is also your understanding that an election under subsection 99(2) will not affect the availability of the C.C.A. claim.

We are of the opinion that the mere transfer of the business of a partnership to a third party does not, in and by itself, dissolve the partnership.

The question of whether a partnership, formed pursuant to The Partnership Act of Ontario (the Partnership Act) is dissolved at a particular time depends on (a) the terms of any agreement between the partners (b) sections 32 to 35 of the Partnership Act.

Partners may agree among themselves that the transpiring of certain events will cause the partnership to be dissolved. In order to determine if a certain event has caused the partnership to be dissolved one has to look to the agreement.

Subject to any agreement between the partners, sections 32 and 33 of the Partnership Act lists the following events which will result in a partnership being dissolved:

(a) if entered into for a fixed term, by the expiration of that term:

(b) if entered into for a single adventure on undertaking, by the termination of that adventure or undertaking;

(c) if entered into for an undefined time, by a partner giving notice to the other or others of his intention to dissolve the partnership; or

(d) by death or insolvency of a partner.

Based on this and provided that the partnership is dissolved at or before the time it transfers its business and assets to a corporation and that subsection 98(1) applies, subsection 99(1) deems the fiscal period to end immediately before the time the partnership actually ceases to exist. Under these circumstances, the partnership can claim capital cost allowance for the fiscal period ending immediately prior to the time it ceases to exist, subject to the provisions of Regulation 1100(3).

An election under subsection 99(2) will not in itself affect the availability of the capital cost allowance claim. This subsection does not extend the duration of the taxation year but merely enables a taxpayer to treat the short 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.

The second question you have asked is whether consideration in the form of debt received by a farm partnership for its farm inventory on a subsection 85(2) transfer can be transferred to the partners tax deferred under subsection 85(3). You have also presented the following hypothetical situation regarding your question:

A partnership has a dairy herd worth $100,000 which it transfers to the corporation by electing under subsection 85(2) at $100,000. Consideration given by the corporation is two common shares and debt of $99,998. The partnership wishes to distribute the debt to the partners under subsection 85(3). You have also pointed out that the partnership and the corporation would be reporting their income on the cash basis.

It is our opinion that although subsections 85(1) and 85(2) of the Act would apply to deem the elected amount in respect of inventory to be proceeds of disposition, it would not extend further to deem such proceeds to have been received within the ambit of subparagraph 28(1)(a)(i). The time of actual receipt is a determination of fact (see Interpretation Bulletin IT-433). Therefore, it is our view that an open account or note payable would not necessarily constitute income to the vendor in the year of transfer. Where both the vendor and the corporation are reporting income on the cash basis, the consideration for inventory transferred to the corporation should be included in computing income of the vendor for the year or years in which payments are received from the corporation and the corresponding costs of the inventory would be deductible by the corporation in the year they are paid. When the open account or note is transferred from the partnership to a partner under subsection 85(3), it is our view that the same principles apply, due to the interaction of subsections 23(1) and 28(5) of the Act.