30 June 2014 External T.I. 2014-0522181E5 F - Legal status of partnership and application of 98(6)

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98(6)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Our comments

Legal status of a partnership

Application of subsection 98(6)

Principal Issues: (1) What is the legal status of the partnership considering its obligation to make a declaration in accordance with the provisions of article 118 of the Act respecting the implementation of the reform of the Civil Code? (2) Whether subsection 98(6) applies when a limited partnership becomes a general partnership following the dissolution of its sole corporate general partner?

Position: (1) The determination of the legal status of a partnership is a question of fact and law that can only be resolved after a full examination of all facts and circumstances surrounding the relevant situation. (2) Yes, if all conditions provided in subsection 98(6) are satisfied. We do not have enough facts to conclude. If the outgoing partner was provided with his share of the partnership property before the partnership ceases to exist, Canada Revenue Agency would administratively consider the term "all of the property" in subsection 98(6) satisfied if all of the property of the old partnership was directly transferred by the predecessor partnership to the new partnership immediately after the settlement of the outgoing partner's interest.

Reasons: Based on our interpretation of subsection 98(6) and consistent with our positions in previous technical interpretations.

XXXXXXXXXX Marie-Claude Routhier
LL.B., D.D.N., M. Fisc.
2014-052218

June 30, 2014

Subject: Legal status of a partnership and the application of subsection 98(6)

This is in response to your letter received by the Tax Rulings Directorate (the "Directorate") on February 27, 2014, in which you requested our views with respect to the legal status of a Canadian partnership, in view of the requirement for partnerships to make a declaration in accordance with section 118 of the Act respecting the implementation of the reform of the Civil Code ("LARCC”).

In addition, you also wish to receive our comments regarding the application of subsection 98(6) of the Income Tax Act (the "Act") if the partnership becomes a general partnership as a result of the dissolution of its sole corporate general partner. We understand that the new general partnership will consist solely of the limited partners of the predecessor partnership.

Unless otherwise indicated, all legislative references in this document are to the provisions of the Act.

This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings and Technical Interpretations.

Our comments

Legal status of a partnership

The determination of the legal status of a partnership is a question of fact and law on which the Directorate does not have a mandate to make a decision on a request for a technical interpretation. Please note, however, that a similar question was previously referred to our legal services. Our comments on this subject were published in 9617965 and 962093A.

Application of subsection 98(6)

Generally, under subsection 98(6), where a Canadian partnership (the "Predecessor Partnership") has ceased to exist at any particular time and, at or before that time, all of its property has been transferred to another Canadian partnership (the "New Partnership") consisting solely of the members of the Predecessor Partnership, the New Partnership is deemed to be a continuation of the Predecessor Partnership and any member’s partnership interest in the New Partnership will be deemed to be a continuation of the member’s partnership interest in the Predecessor Partnership.

The Act does not set out the circumstances for determining when a partnership is to be considered to have ceased to exist. In addition to the causes of dissolution provided for in the partnership agreement, a partnership may be dissolved by virtue of the relevant provisions of the applicable provincial or territorial law. In this situation, we must therefore determine whether the partnership was dissolved under the terms of the partnership agreement or the applicable provisions of the C.C.Q. This question is a question of fact and of law which can only be resolved after a full examination of all facts, circumstances and documents relating to the transaction.

In order for the provisions of subsection 98(6) to apply, the Predecessor Partnership must otherwise have surrendered all of its property to another Canadian partnership at the time it ceased to exist or before that time and the New Partnership must be composed only of the members of the Predecessor Partnership. The New Partnership does not have to be composed of all partners of the Predecessor Partnership to meet the conditions set out in subsection 98(6). However, all partners of the New Partnership must have been partners of the Predecessor Partnership immediately before the transfer. Furthermore, where a partner withdraws and has received its share of the property of the Predecessor Partnership before the Predecessor Partnership ceased to exist, the Canada Revenue Agency (CRA) will consider that all the property of the Predecessor Partnership will have been transferred to the New Partnership if all the property has been directly transferred to the New Partnership immediately after the settlement of the interest of the outgoing partner.

Finally, you did not provide sufficient information to enable us to comment on the tax consequences of the transaction as a whole, such as the adjusted cost base of the members’ interest in the Predecessor Partnership and the at risk amount of the limited partners. It should be noted that any transactions or series of transactions intended to avoid the application of the rules set out in subsection 40(3.1) or 40(3.4) or those relating to at risk amounts are carefully considered by the CRA.

We hope that our comments will be of assistance.

Best regards,

Randy Hewlett
Director
International Operations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch

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Text of Severed Letter

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.

Nos commentaires

Statut juridique d'une société de personnes

Application du paragraphe 98(6)

Principales Questions: (1) What is the legal status of the partnership considering its obligation to make a declaration in accordance with the provisions of article 118 of the Act respecting the implementation of the reform of the Civil Code? (2) Whether subsection 98(6) applies when a limited partnership becomes a general partnership following the dissolution of its sole corporate general partner?

Position Adoptée: (1) The determination of the legal status of a partnership is a question of fact and law that can only be resolved after a full examination of all facts and circumstances surrounding the relevant situation. (2) Yes, if all conditions provided in subsection 98(6) are satisfied. We do not have enough facts to conclude. If the outgoing partner was provided with his share of the partnership property before the partnership ceases to exist, Canada Revenue Agency would administratively consider the term "all of the property" in subsection 98(6) satisfied if all of the property of the old partnership was directly transferred by the predecessor partnership to the new partnership immediately after the settlement of the outgoing partner's interest.

Raisons: Based on our interpretation of subsection 98(6) and consistent with our positions in previous technical interpretations.

XXXXXXXXXX Marie-Claude Routhier
LL.B., D.D.N., M. Fisc.
2014-052218

Le 30 juin 2014

Objet : Statut juridique d'une société de personnes et application du paragraphe 98(6)

La présente vous est transmise en réponse à votre lettre reçue par la Direction des décisions en impôt (la « Direction ») le 27 février 2014, dans laquelle vous demandez notre opinion quant au statut juridique d'une société en commandite canadienne, compte tenu de l'obligation pour les sociétés de personnes de se déclarer conformément à l'article 118 de la Loi sur l'application de la réforme du Code civil (la « LARCC »).

Par ailleurs, vous désirez également obtenir nos commentaires concernant l'application du paragraphe 98(6) de la Loi de l'impôt sur le revenu (la « Loi ») si ladite société de personnes devient une société en nom collectif suite à la liquidation de son seul associé commandité corporatif. Nous comprenons que la nouvelle société en nom collectif sera uniquement composée des associés commanditaires de la société de personnes remplacée.

Sauf indication contraire, tous les renvois législatifs dans le présent document sont des renvois aux dispositions de la Loi.

La présente lettre offre des commentaires généraux sur des dispositions contenues dans la Loi et d'autres lois connexes, le cas échéant. Elle n'a pas comme but de confirmer le traitement fiscal relativement à une situation donnée mettant en cause un contribuable en particulier, mais plutôt de vous aider à le déterminer. La Direction ne confirme le traitement fiscal relatif aux opérations données d'un contribuable en particulier que dans le cadre d'une demande de décision anticipée en matière d'impôt sur le revenu présentée de la façon décrite dans la circulaire d'information IC 70-6R5, Décisions anticipées en matière d'impôt sur le revenu.

Nos commentaires

Statut juridique d'une société de personnes

La détermination du statut juridique d'une société de personnes constitue une question de fait et de droit sur laquelle la Direction n'a pas le mandat de se prononcer dans le cadre d'une demande d'interprétation technique. Veuillez néanmoins prendre note qu'une question similaire a été soumise à nos services juridiques par le passé. Nos commentaires à ce sujet ont été publiés dans les documents 9617965 et 962093A.

Application du paragraphe 98(6)

De façon générale, aux termes du paragraphe 98(6), lorsqu'une société de personnes canadienne (la « SP remplacée ») a cessé d'exister à un moment donné et que, à ce moment ou avant ce moment, tous ses biens ont été cédés à une autre société de personnes canadienne (la « nouvelle SP ») composée uniquement des associés de la SP remplacée, la nouvelle SP est réputée être la continuation de la SP remplacée et la participation de tout associé dans la nouvelle SP est réputée être la continuation de sa participation dans la SP remplacée.

La Loi ne prévoit pas les circonstances permettant de déterminer le moment où une société de personnes est considérée avoir cessé d'exister. Outre les causes de dissolution prévues au contrat de société, une société de personnes peut être dissoute par l'effet des dispositions pertinentes de la loi provinciale ou territoriale applicable. Dans la situation en espèce, nous devons donc déterminer si la société de personnes a été dissoute aux termes des clauses du contrat de société ou des dispositions applicables du C.c.Q. Cette question constitue une question de fait et de droit qui ne peut être résolue qu'après un examen complet de tous les faits, circonstances et documents relatifs à la transaction.

Afin que les dispositions du paragraphe 98(6) trouvent application, la SP remplacée doit par ailleurs avoir cédé tous ses biens à une autre société de personnes canadienne, au moment où elle a cessé d'exister ou avant ce moment, et la nouvelle SP doit être composée uniquement des associés de la SP remplacée. La nouvelle SP n'a pas à être composée de tous les associés de la SP remplacée pour satisfaire aux conditions énoncées au paragraphe 98(6). Toutefois, tous les associés de la nouvelle SP doivent avoir été associés à la SP remplacée immédiatement avant le transfert. De plus, lorsqu'un associé se retire et qu'il a reçu sa part des biens de la SP remplacée avant que celle-ci n'ait cessé d'exister, l'Agence du revenu du Canada (l' « ARC ») considérera que tous les biens de la SP remplacée ont été cédés à la nouvelle SP si tous les biens ont été directement transférés à la nouvelle SP immédiatement après le règlement de la participation de l'associé sortant.

Enfin, vous ne nous avez pas soumis suffisamment d'informations pour que nous puissions nous prononcer relativement aux conséquences fiscales applicables à l'ensemble de la transaction, notamment le prix de base rajusté des participations des membres de la SP remplacée et la fraction à risque des commanditaires. Mentionnons que toutes opérations ou séries d'opérations visant notamment à éviter l'application des règles énoncées au paragraphe 40(3.1) ou 40(3.4) ou celles relatives aux fractions à risque sont examinées attentivement par l'ARC.

En espérant que nos commentaires vous seront utiles, nous vous prions d'agréer, Madame XXXXXXXXXX, nos salutations les meilleures.

Randy Hewlett
Directeur
Division des opérations internationales
Direction des décisions en impôt
Direction générale de la politique législative et des affaires réglementaires

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 98 - Subsection 98(6)

rollover on dissolution of general partner

Does s. 98(6) apply when a limited partnership becomes a general partnership following the dissolution of its sole corporate general partner (so that its partners are solely the former limited partners)? CRA stated (TaxInterpretations translation):

[A]ll partners of the New Partnership must have been partners of the Predecessor Partnership immediately before the transfer. Furthermore, where a partner withdraws and has received its share of the property of the Predecessor Partnership before the Predecessor Partnership ceased to exist, the Canada Revenue Agency (CRA) will consider that all the property of the Predecessor Partnership will have been transferred to the New Partnership if all the property has been directly transferred to the New Partnership immediately after the settlement of the interest of the outgoing partner.

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30 June 2014 External T.I. 2014-0522181E5 F - Legal status of partnership and application of 98(6)

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Translation disclaimer

Our comments

Legal status of a partnership

Application of subsection 98(6)

Nos commentaires

Statut juridique d'une société de personnes

Application du paragraphe 98(6)