6 August 2010 External T.I. 2009-0350571E5 - Grandfathering under 98(3)(d)

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.

Principal Issues: Whether grandfathering under the coming-into-force rules for the repeal of paragraph 98(3)(d) would apply to goodwill that is a replacement property.

Position: Replacement property is not grandfathered if it was acquired by the partnership after December 4, 1985, otherwise than pursuant to an agreement in writing entered into before that date.

Reasons: Wording of the coming-into-force rules for the repeal of paragraph 98(3)(d).

XXXXXXXXXX
                        2009-035057
                        C. Tzortzis
August 6, 2010

Dear XXXXXXXXXX :

Re: Coming-into-force rules for the repeal of paragraph 98(3)(d)

We are writing in reply to your letter dated November 30, 2009, wherein you inquire about the coming-into-force rules for the repeal of paragraph 98(3)(d) of the Income Tax Act ("Act") and whether goodwill that is a replacement property under subsection 14(7) of the Act would qualify for the "bump" under the grandfathering rules.

It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the CRA Web site at
www.cra-arc.gc.ca. Since your inquiry concerns an actual situation involving questions of fact, it should be dealt with by your local tax services office. If you wish to have the CRA review your actual situation, you should submit all of the relevant information and documentation to the particular tax services office serving your area, a list of which is available on the "Contact Us" page of the CRA Web site. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

In general, provided certain conditions are met, subsection 98(3) of the Act is an elective provision that permits property of a Canadian partnership which has ceased to exist to be distributed to its members at the cost amount of the property to the partnership. Where certain conditions are met, this provision allows a special increase or "bump" in the tax value of the distributed partnership property. Paragraph 98(3)(c) governs the "bump" on capital property (other than depreciable property). Prior to its repeal (discussed below), paragraph 98(3)(d) governed the "bump" on property other than non-depreciable capital property and read as follows:

(d) the amount determined under this paragraph in respect of each such person's undivided interest in each such property that was depreciable property or a property other than a capital property of the partnership is such portion of

(i) the amount, if any, by which the excess, if any, described in subparagraph (b)(ii) exceeds the aggregate of amounts designated by him under paragraph (c) in respect of his undivided interests in all such capital properties (other than depreciable property)

as is designated by him in respect of the property, except that

(ii) in no case shall the amount so designated in respect of his undivided interest in any such property exceed the amount, if any, by which his percentage of the fair market value of the property immediately after its distribution exceeds his percentage of the cost amount to the partnership of the property immediately before its distribution, and

(iii) in no case shall the aggregate of amounts so designated in respect of his undivided interests in all such properties that are depreciable property or properties other than capital properties, exceed 1/2 of the amount determined under subparagraph (i) in respect of him;

Paragraph 98(3)(d) has been repealed in respect of certain events occurring after December 4, 1985. The paragraph continues to apply to certain grandfathered partnership property. Specifically, the coming-into-force rules provide that the provision is repealed with respect to property received by a member of a partnership where

(a) the property was acquired by the partnership after December 4, 1985, otherwise than pursuant to an agreement in writing entered into before that date,

(b) the property is received in satisfaction of an interest in the partnership acquired by the member after December 4, 1985, otherwise than

(i) pursuant to an agreement in writing entered into on or before that date, or

(ii) from a person with whom the member was not dealing at arm's length, where the interest in the partnership has not been acquired in an arm's length transaction after December 4, 1985, otherwise than pursuant to an agreement in writing entered into on or before that date, and, for the purposes of this subparagraph, "arm's length" has the meaning it would have for the purposes of the said Act if it were read without reference to paragraph 251(5)(b) thereof, or

(c) the property is received in satisfaction of an interest in the partnership that was owned by a corporation at a time when control thereof was acquired (otherwise than by reason of an acquisition described in paragraph 256(7)(a) of the said Act) after December 4, 1985, otherwise than pursuant to an agreement in writing entered into on or before that date.

The application provision has been amended several times as a result of changes to the inclusion rate for capital gains. Due to the length, we have not reproduced these amendments here but we have enclosed copies for your reference. These amendments are deemed to have come into force on December 19, 1986, the day on which the original statute that repealed paragraph 98(3)(d) received Royal Assent.

As per the above coming-into-force rules, the "bump" under paragraph 98(3)(d) is not available where the property was acquired by the partnership after December 4, 1985, otherwise than pursuant to an agreement in writing entered into before that date. Therefore, in our view, goodwill that is a replacement property under subsection 14(7) of the Act and that was acquired after December 4, 1985 would not qualify for the "bump" under the grandfathering rules of paragraph 98(3)(d).

We trust that these comments will be of assistance.

Yours truly,

G. Moore
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch